The Hindu Business Line : Not the right time for credit derivatives: RBI

Mumbai, June 19 The Reserve Bank of India today said it has decided against issuing the final guidelines on introducing credit derivatives, given the adverse developments in the global financial markets.

In its note issued here, the RBI said that adverse developments in different international financial markets, particularly the credit markets, have resulted in considerable volatility, such as mounting losses suffered by banks on account of sub-prime crisis and tightness in liquidity.

Also, considering the level of risk management systems and possible non-adherence to regulatory guidelines on complex products such as credit derivatives, the time is not considered opportune to introduce credit derivatives in India for the present, the RBI said.

The RBI had issued the draft guidelines in 2003. However, after considering the status of the risk management practices prevailing in the banking system then, the RBI had deferred the issuance of the final guidelines.

Modified guidelines on credit default swaps were issued first in May 2007 and a second draft in October 2007.

According to a senior bank official, the scope for credit derivatives is limited as against forex derivatives, because they can be used only by corporates borrowing in foreign currency, whereas forex derivatives can be used by all exporters and importers.

Also, given the current situation of litigations filed by corporates against banks and the overall tightness in credit supply, it is unlikely that corporates would be interested in such credit derivates products, he said.

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