Banks dissuaded from dealing in Russian dollar bonds

 

Indian banks should not subscribe to Russian government bonds denominated in dollars ‘for the time being' as Russia is included in the list of non-co-operative countries by the Financial Action Task Force, a delegation of Indian commercial banks, which visited Russia in July, has recommended.

 

While pointing out that it is necessary for each domestic bank to take a relook at its strategy on trade and banking relations with Russian banks without diluting risk management standards, the delegation came to a conclusion that “though the yield, at 500-700 basis points over the London Inter Bank Offered Rate, looks attractive we do not recommend banks to subscribe to such bonds for the time being.”

 

It pointed out that development of banking relationship on a firm footing will depend heavily on Russia's ability to convince FATF for a faster ‘delisting' from the latter's list of non-co-operative countries.

 

Though several Indian banks have formal correspondent relationship with a few Russian banks, Indian banks have not been able to place regular sovereign and counter-party bank limits in favour of Russian banks so far on account of risk issues.

 

In the absence of a general limit, banks have been confirming Letters of Credit and guarantees on a case-to-case

basis.

 

In this regard, the delegation, which was lead by M Venugopalan, executive director, Union Bank of India, and V K Chopra, ED, Oriental Bank of Commerce, has recommended that all Indian banks may place counter-party limits in favour of select Russian banks within the overall sovereign limits and boards of banks may, based on risk assessment, decide the amounts individually.

 

Further banks may exchange data on the amount of limits and outstandings at monthly intervals for information and monitoring.

 

In view of the potential for development of bilateral trade in hard currency (the Indian rupee balance driven settlement is expected to be over shortly), it said that on select export products Indian banks may consider providing advance payments towards pre-export processing against Russian bank guarantees within the overall counter-party limits.

 

However, the period for such exposures should be restricted to six months to begin with.

After gaining experience with trade related transactions, Indian banks should consider placing money market lines of credit in favour of select Russian banks.