Exposure of Indian banks to derivatives rose 79 per cent to Rs 13,999 crore (Rs 139.99 billion) at the end of June 2007, as against Rs 7,818 crore (Rs 78.18 billion) in the corresponding period in June 2006, data released by Reserve Bank of India [Get Quote] said.

The increased exposure of banks to derivatives had prompted the central bank to seek data on this portfolio and the provision made for possible losses.

The volatility in the global currency markets and its impact on the derivative portfolio of banks had forced the regulator to inspect the books of some private and foreign banks. Inspection has shown that banks have made adequate provisions and have sufficient cushion to cover losses, if any.

RBI's latest data also showed that bank exposure from guarantees increased nearly 63 per cent to Rs 16,988 crore (Rs 169.88 billion) compared with Rs 10,424 crore (Rs 104.24 billion) in June 2006. International claims include business booked abroad by foreign offices of Indian banks.

"Indian banks operating overseas have seen more than 40 per cent growth in their business. The growth is largely on account of Indian companies expanding their footprint globally. Banks have been extending performance guarantees to some of their clients, loan guarantees and advance payment guarantees. With companies exporting and importing goods from various countries, the need for hedging against currency risks and the need for derivative structures have grown. The volumes in the derivative market has risen in the past one year,'' said an executive director of a private sector bank.

According to the RBI data, about 54 per cent of foreign claims of Indian banks are concentrated in five countries, United States (22.6 per cent), United Kingdom (16.1 per cent), Singapore (6.1 per cent), Germany (5 per cent), and United Arab Emirate (4.5 per cent) at the end of June 2007.

In the international claims of banks arising from derivatives, France had the maximum share at 26 per cent, followed by the UK at 22 per cent, the US at 15.1 per cent, Germany at 6.9 per cent and Indonesia at 4.4 per cent. 

International claims of banks arising from guarantees, the USA had the maximum share at 30.1 per cent, followed by China (9.7 per cent), Switzerland (9.4 per cent), Germany (8.7per cent) and the UK (5.4 per cent).

"India's international trade has grown around 25 per cent. We have also seen large corporates actively participate in outbound acquisitions through bank finance. This has also increased the international claims of Indian banks," said an economist with a foreign bank. 

"Banks issue guarantees, give commitments as part of normal business activity. The rise in claims is reflection of growing internationalisation of business," he said.

High Exposure

Exposure of Indian banks to derivatives rose 79 per cent to Rs 13,999 crore at the end of June 2007

About 54 per cent of foreign claims of Indian banks are concentrated in five countries -- the US, the UK, Singapore, Germany and the UAE