Banks told to disclose troubled exposure

Banks told to disclose troubled exposure

While Lehman Brothers filed for bankruptcy on 15 September, the Federal Reserve Bank of New York provided AIG a two-year $85 billion (around Rs4 trillion) emergency loan to avert its collapse.

In return, the US government acquired a 79.9% stake in AIG. JPMorgan Chase bought struggling Washington Mutual, one of the US’ largest savings and loans banks, and the governments of Belgium, the Netherlands and Luxembourg infused cash to avert a run on Fortis, taking a 49% stake in exchange.

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India’s central bank is also planning to conduct a special audit of the country’s largest private sector bank, ICICI Bank Ltd, to assess whether it has any exposure to these entities and the possible impact that the exposure can have on its profit and loss account, according to a senior RBI official, who did not want to be named.

ICICI Bank said its exposure to Lehman Brothers is $83 million, less than 0.1% of the consolidated total assets of the ICICI group.

State Bank of India, Bank of India, Bank of Baroda, Punjab National Bank, Axis Bank Ltd and a few other Indian banks have a small exposure to Lehman Brothers in various forms.

ICICI Bank declined to comment on the development.

Tuesday’s letter is the second instance of Indian central bank writing to the chief executive officers of commercial banks since Lehman Brothers filed for bankruptcy.

Immediately after the collapse of Lehman Brothers, RBI had sought information from Indian banks on their exposure to the Wall Street bank.

It had asked banks to unwind interest rate swap transactions entered with Lehman Brothers Fixed Income Securities Pvt. Ltd, the primary dealership arm of the US investment bank.

Unwinding is a financial term for closure of an investment position.

The Fixed Income Money Market and Derivatives Association of India, a voluntary market body for the bond, money and derivatives markets, worked closely with banks to enable them pare this exposure.

“We have sent letters to the chief executive officers of all banks seeking information on their exposure to the troubled financial entities. As a part of our offsite inspection, we ask banks to provide us with specific information in relation to specific developments," the RBI official said.

When RBI inspectors visit the premises of a bank for audit, it is called onsite inspection.

“One should not attach too much importance to the special audit on ICICI Bank which we are planning to conduct now. We are just trying to assess the bank’s exposure to these entities," said the official.

According to him, this is part of “prompt corrective action" which the regulator undertakes whenever it feels there could be some stress in any part of the financial sector.

On Tuesday, an RBI statement said ICICI Bank has sufficient liquidity to meet the requirements of its depositors.

It also said that the bank and its subsidiaries are well capitalised and RBI has arranged to provide adequate cash to ICICI Bank to meet the demands of its customers at its branches and ATMs.

Shares of ICICI Bank rose close to 12% over the past two days. On Wednesday, they closed at Rs551.45 each.

The special audit is not a rare phenomenon. Earlier this year, RBI conducted similar audits to check the books of a few banks that aggressively sold structured derivatives to Indian corporations.

While banks insisted that those derivatives were sold to help firms manage currency risks, some firms went to court alleging misselling of such products by banks.

“Following the audits, we could know that it was not a systemic problem," said the RBI official.

Similar audits were also conducted a few years back when several banks, both in the private as well as public sector, were found flouting KYC (“know your customer") norms, and allowing individuals to open demat (electronic share) accounts with fictitious names and addresses.

About half a dozen banks were penalized by RBI for their role in the IPO (initial public offer) scam in which certain entities cornered large part of shares meant for retail investors by opening thousands of fictitious demat accounts.

RBI conducts two types of inspections—onsite and offsite.

The onsite inspection is an annual exercise while the offsite inspection is conducted on a quarterly basis.

As part of the offsite inspection, every quarter, the central bank asks for information from banks to assess their asset-liability management, quality of assets and other financial parameters.

RBI inspectors visit banks’ offices typically between May and June, after the fiscal year ends in April, as part of the onsite inspection that is conducted every year.

This supervision is done on the basis of CAMELS principle focusing on capital adequacy ratio, asset quality, management quality, earnings, liquidity and systems and controls.

“RBI has the liberty to ask for any information from any bank which could be outside the routine inspection process," added the RBI official.