RBI fearing an Indian subprime?

RBI believes and has hard evidence that a problem similar to subprime exists in the Indian market and this time due to Indian companies exposing themselves to complex derivative products denominated in foreign exchange, sources said.

NDTV has learnt that this might be the reason why RBI warned corporates on exposure to foreign exchange derivatives.

Sources have confirmed to NDTV that two Indian private banks and three foreign banks are sitting on massive open positions in foreign exchange derivative products and all these banks have been given a warning by RBI to unwind the positions.

NDTV is not revealing the names of these banks since it is yet to get their comments on the issue despite requesting them to clarify their position.

If the total amount which is stuck is calculated based on positions of other banks in the system, it could potentially pose a risk of over Rs 10,000 crores whereas some say it could be over $3 billion.

Call it India's own subprime problem but the systemic crisis which is now a huge talking point amongst the corporate and treasury circles is yet to unfold in the open.

NDTV has met and spoken to more than five treasury heads of leading banks who confirmed that the total amount could exceed over $3 billion and if this amount is not absorbed by the banks, it could mean a write off on their balance sheets.

Looking at the banks strength it may not wipe them out yet but the fear of write offs is now knocking on the door of these Indian banks. The question is why and how did this begin and is financial innovation and greed for profits once again the reason?

New private sector banks who have been aggressively pushing forex derivative products to corporate clients approach CFOs of companies to increase their exposure to book profits through trading.

But since the RBI only permits these banks to run books for certain forex derivative products they try and offer more complex products through other sources.

To meet corporate demands, these banks have been buying complex structured products from foreign banks.

Now that the dollar has turned so sharply not just against the rupee but also against other currencies, these structured products are resulting in losses so foreign banks are looking to square off positions.

But with corporate not willing to square off at their end, these domestic banks face the possibility of having to take a hit to their balance sheets and if one were to quote the policy, it clearly said: " Banks are also urged to carefully monitor corporate activity in terms of treasury/trading activity and sources of other income to the extent that embedded credit/market risks pose potential impairment to the quality of banks' assets."

Experts say that the problem is arising from the corporate sector where many large corporates are keeping derivative positions open and are avoiding booking forex losses in their quarterly reports.

But in the past they were happy dealing in complex forex derivatives since it gave them handsome treasury profits. Now company boards are not willing to take a hit on the bottomline and are hence refusing to square off the positions which in turn is putting banks at risk.