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IDBI Bank on Wednesday underwrote two credit default swap transactions in respect of REC and IRFC bonds held by ICICI Bank, thus becoming the first public sector bank to enter into such a transaction for managing credit risks associated with Indian corporate bonds.
The CDS transaction involved IDBI Bank selling protection (or insurance) to the private sector bank (protection buyer) in respect of a possible credit default on the latter's holding of REC and IRFC bonds for a notional amount of Rs 5 crore each.
Will boost funding
“The launch of the CDS market in India will encourage foreign institutional investors to invest in domestic corporate bonds. This will provide much needed funding for the projects, including infrastructure sector,” Mr Melwyn Rego, Executive Director, IDBI Bank, said
According to Mr N. S. Venkatesh, Chief General Manager, IDBI Bank, though the CDS transaction involves two ‘AAA' rated bonds, which carry the least risk in terms of probability of credit default, as the market develops it will warm up to transactions in lower-rated bonds.
Ms Shilpa Kumar, Senior General Manager, ICICI Bank, said this transaction marks the formal introduction of local currency CDS market in India and would facilitate the development of the corporate bond market.
The spread (or annual amount the protection buyer must pay the protection seller, expressed as a percentage of the notional amount, over the length of the contract: 1 year) on the transaction, as per the CCIL Web site was 90 basis points (or 0.9 cent).
RBI guidelines
The Reserve Bank of India had issued prudential guidelines on CDS transactions on corporate bonds on November 30, 2011. These guidelines refer to CDS transactions underwritten by the Indian operations of foreign banks, Indian banks and overseas branches/subsidiaries/joint ventures of Indian banks.
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