Kolkata: The State Bank of India (SBI) has not made any provision for potential mark-to-market (MTM) losses on its $800million (Rs3,256 crore) exposure to foreign exchange derivatives but the country’s largest lender is ready to extend fresh line of credit to its corporate clients to tide over such losses.
Mark to market is an accounting practice of assigning a value to a position held in a financial instrument, based on the current market price for that instrument. Hundreds of Indian companies have bought complex cross-currency options and structured products to seemingly protect themselves from foreign exchange risk but they are now staring at significant MTM losses with dollar losing its value against most of the global currencies.
“We only have a credit risk, but any loss on derivatives exposure would be borne by our clients,” SBI’s chairman O.P. Bhatt said. “If needed, we’ll provide them support to on a case-to-case basis to tide over the difficulty.”
Under the law, Indian banks cannot have a naked exposure to cross-currency derivatives. This means all cross-currency options and swaps of their customers are hedged back-to-back with the same tenure and amount with foreign banks. So, if a company defaults, banks will have to pay up to settle the contracts with counter-parties.
SBI’s managing director Sanjay Bhattacharya said the bank would provide fresh line of credit to clients facing losses in derivatives contracts. “Unlike other banks, we have not dealt with unknown parties— we have dealt only with our clients. We have had relationships with them for years, so we wouldn’t mind creating a facility for them to pay in instalments,” Bhattacharya said.
Even though the bank has not made any provision for the MTM losses of its corporate customers for their exposure to cross-currency options and structured derivative products, it has provided $10 million towards its $20 million exposure to sub-prime assets, Bhatt said. He claimed his bank had aggressively provided for its exposure to sub-prime assets, and was hopeful of “significant recovery” in the days ahead.
India’s largest private sector lender, ICICI Bank Ltd, has made provisions worth $100 million in the quarter ending 31 March to take care of MTM losses for the bank’s exposure in collateralized borrowing and lending obligation and credit-linked notes. Public sector Bank of India, too, has provided for $5 million to cover its MTM losses in credit-linked notes.
Among all Indian banks, only Axis Bank Ltd has made a provision for MTM losses of its corporate clients. The new generation private bank has provided for Rs71.97 crore to cover the MTM losses of two of its clients who have moved court against the bank.
SBI’s Bhatt claimed his bank is on a “firm wicket” as there has not been any court case against the bank.
At last count, at least eight cases have been filed by firms against banks and many more are likely to be filed. ICICI Bank and Axis Bank are two banks facing several court cases. Risk management consultants and audit firms say the Institute of Chartered Accountants of India’s insistence that all firms should disclose and provide for losses on derivatives contracts from the current financial year will act as a trigger for more court cases.
Among banks that have announced their fourth quarter earnings, Bank of India’s corporate clients have posted MTM losses of Rs125 crore, that of Corporation Bank, Rs20 crore and IDBI Bank Ltd Rs173 crore. However, none of them has provided for such losses.
If other banks were to follow the SBI example of extending a fresh line of credit to their clients to tide over the MTM losses, it will be a boon for many medium and small firms running the risk of their net worth being wiped out by such losses. Early this week, KPIT Cummins Infosystems Ltd reported Rs89.27 crore MTM losses for the quarter ended March while the loss of Wockhardt Ltd was Rs27.9 crore, about one-third of its net profit.
Reserve Bank of India governor Y.V. Reddy has, however, downplayed the issue. In an interview with Mint on 29 April, he said: “Even in the worst case scenario, the banks involved have enough capital to be able to absorb the losses and therefore there is no systemic issue.”
On Friday, SBI reported a 26% increase in its fourth quarter profit to Rs1,883 crore on total income of Rs7,618 crore. SBI, which controls 23% of India’s banking business along with its associates, said loans grew 23.4% in the year, slowing from 30% a year ago.
Addressing an analyst meet, Bhatt said the bank expected its assets to grow 20-25% in this fiscal year. Target for deposit growth was 22%. Net interest margin, which declined marginally to 3.07% last fiscal year, could fall further to 3%.
(Reuters also contributed to this story.)