Mumbai: India will not delay the launch of a credit default swaps (CDS) market but will move carefully due to the risks associated with such derivatives, a Reserve Bank of India deputy governor said on Tuesday.
The central bank released draft rules last week proposing CDS be permitted only in corporate bonds and that investors in infrastructure debt should be the first in India to be allowed to hedge against risk using the instruments..
“We are introducing credit default swaps at the time when the world is shying away from it. So we need to understand the risks,” Shyamala Gopinath, one of the four deputy governors of the Reserve Bank of India (RBI) said.
A CDS is a swap contract in which the buyer of protection against a bond or loan makes regular premium payments to a counterparty who assumes the risk in the event of a default.
“Yes, of course, not to delay it,” Gopinath told reporters when asked whether CDS will be introduced sooner or later.
The RBI had deferred the introduction of CDS following the global financial crisis even though it had issued draft rules in 2003 and 2007.
On loan securitization, Gopinath said sustainable securitization would be the main criteria for the central bank while issuing final guidelines, but said there was no timeframe releasing the final norms on securitization.
“There has to be sustainable securitization. You cannot have market growing on the basis of some arbitrage,” Gopinath told reporters on the sidelines of a seminar.
The RBI had released planned rules for securitization in April suggesting among other things, that banks must hold on to a loan for at least nine months before converting it into a securitized asset.
Securitization of assets, or bundling together loans into one security that can then be traded, was allowed in India a decade ago and banks quickly turned to it as a means to hedge their interest rate risk.
But banks want the minimum holding period and retention requirement to be reduced.
“Non-banking finance companies have asked for some kind of differential treatment. We are looking at all the issues,” Gopinath said.
“We also have a technical advisory committee on markets. We will also get their feedback before we put out the final guidelines.”