State Bank takes Rs 40 cr derivatives exposure hit

The turmoil in the global credit market following the US crisis has hit Indian banks in the form of mark-to-market losses in the currency derivatives they sold their clients at home, HT reports.

The State Bank of India, India’s largest public sector bank, is likely to make a provision of Rs 40 crore in the quarter ending March 31, 2008, for potential losses in derivatives trading. The bank is expected to announce its fourth-quarter results on May 2.

HT Image

The bank's clients were likely to face Rs 700 crore losses in currency derivative trading for the year ended March 31, 2008, OP Bhatt, chairman SBI, told reporters in Mumbai on Wednesday. Indian companies took to buying forex derivative instruments to hedge against foreign currency exposure when the rupee started appreciating last year.

"We have been doing derivative deals for our customers. They made profits a year back. This year, they may make a loss of Rs 700 crore," Bhatt said. These are mark-to-market losses suffered on derivative instruments held by customers. Mark-to-market losses or profits are the value of a particular financial instrument based on the current market price of the instrument.

The turmoil in the global credit market following the US sub-prime crisis has hit Indian banks in the form of mark-to-market losses in the currency derivatives they sold their clients at home.

SBI's move comes close on the heels of private sector Axis Bank setting aside Rs 71 crore for potential derivative losses when it announced its annual results on Monday. Axis Bank estimated its clients to have losses of Rs 673.55 crore in 188 outstanding derivative transactions structured by the bank. "Like several other banks, Axis Bank has also been active in structuring derivatives transactions for companies, including various types of cross-currency options and swaps," the bank said in a statement.

Bhatt said SBI does not face any court cases from companies on derivatives transactions and it was not likely to make any more provisions for losses beyond the financial year ending March 31, 2008. Around 10-11 companies have taken five banks to court alleging mis-selling of derivative instruments so far. The Reserve Bank of India has said it does not expect any systemic problems out of the derivative losses and a fuller picture will emerge after the annual inspection of bank books in May.

The exposures in the exotic derivative instruments have already started taking its toll on the many of the private sector banks in India. ICICI Bank was the first one to report a loss of $264.34 million on account of its exposures in credit derivatives and investments on January 2008. Other banks suchas Axis bank has rported a loss of Rs 72 crore in the fourth quarter ending march 2008. In addition other others private sector banks such as Kotak Mahindra Bank, Yes bank have also exposures in the derivative trades.