Joel Rebello & G Seetharaman

Mumbai: The Reserve Bank of India on Thursday put off an already-delayed introduction of credit derivatives in India, citing the terrible experience of western banks offering similar products abroad.

Bankers say the product may not be revisited at least for the next one year.

In a note titled ‘Introduction of Credit Derivatives in India: Review of Status’ the RBI said that “time is not considered opportune to introduce the credit derivatives in India.”

The central bank said that the total impact and lessons from the global credit crisis have to be gauged before a credit derivative market gets a go ahead in India.

“The decision has been taken so as to be able to draw upon the experience of the financial sector of some of the developed countries, particularly in the current circumstances, in which the entire dimensions of the recent credit market crisis have not yet been gauged,” the RBI said.

The RBI pointed out to the mounting losses suffered by banks on account of sub-prime crisis, and the need for the central banks of those countries to inject liquidity into the banking system.

“Possible non-adherence to the regulatory guidelines on complex products such as credit derivatives,” was also an issue the central bank said.

Market commentators and senior bankers have welcomed the RBI move as the right step in the current circumstances.

A V Rajwade, banking commentator and forex expert, called it a prudent initiative.

“At this point of time it is difficult to justify the introduction of credit derivatives. Also bankers here have yet to understand the difference between basic hedging and speculation, so it’s the right move,” he said.

Local bankers have been criticised for selling complex forex derivatives products to companies the ramifications of which were not fully understood by their clients.

R H Patil, former managing director of the National Stock Exchange, said bankers in India needed to be taught about these instruments thoroughly before they are introduced.

“RBI or the Indian Banks Association can educate the bankers. Also, there was an impression that all’s well with the US financial system. The way they had underwritten huge insurance contracts and other derivatives was so flawed that the country’s economy is deeply threatened. So, till we study as to what went wrong and learn the lessons, we should not venture into it,” Patil said.

Bankers also welcomed the move, but said the issue was not the understanding of the products but the situation in global markets currently.

Sudhir Joshi, treasurer at HDFC Bank, called the RBI move “cautious and good.”

Anindya Dutta, managing director, capital markets, Calyon Bank, said he is not surprised.

“We have by no means seen the end of the subprime crisis. We are going to see more writedowns by the US and European banks.

Though the RBI was planning to introduce only vanilla credit default swaps, while the problem abroad is with structured products, RBI probably does not want to be accused later introducing a product when the time was not right. I think it is a good move and in a year or so it will introduce credit derivatives,” he said.

Credit derivatives have always been a sticky subject with RBI. The first draft guidelines on them were introduced on March 26, 2003, but final guidelines were delayed as the risk management framework were not ready by then.

Modified guidelines for introducing credit derivatives in a phased manner were introduced on May 16, 2007, followed by a second draft on October 17, 2007.

Source : DNA