RBI again defers introduction of credit derivatives in India

Reserve Bank of India has decided on 19th June 2008, to again keep in abeyance the issuance of the final guidelines on introduction of credit derivatives in India. The decision has been taken so as to be able to draw upon the experience of the financial sector of some of the developed countries, particularly in the current circumstances, in which the entire dimensions of the recent credit market crisis have not yet been gauged.

In view of certain adverse developments witnessed in different international financial markets, particularly the credit markets, resulting in considerable volatility in the recent past, such as mounting losses suffered by banks on account of sub-prime crisis, time is not considered opportune to introduce the credit derivatives in India, for the present.

Reserve Bank of India had issued the ‘Draft Guidelines for Introduction of Credit Derivatives in India’, on March 26, 2003, inviting comments from banks and other stake holders. However, taking into account the status of the risk management practices then prevailing in the banking system, the issuance of final guidelines had been deferred.

Subsequently, it was announced in the Annual Policy Statement for 2007-08 (paragraph 175) that as a part of the gradual process of financial sector lilberalisation in India, it was considered appropriate to introduce credit derivatives in a calibrated manner.

Modified draft guidelines on Credit Default Swaps were, therefore, issued on May 16, 2007. Based on the feedback received on draft guidelines, these were revised and a second draft of the guidelines was issued, on October 17, 2007, for another round of consultation.

NOTE: Credit derivatives are financial contracts designed to transfer credit risk on loans and advances, investments and other assets or exposures from a protection buyer to a protection seller, without transferring the underlying asset.

Credit derivatives are negotiable bilateral contracts that allow users to manage (hedge) their exposure to risk. These derivatives are financial assets like forward contracts, swaps and options, for which the price is determined by the credit risk.

Potential forex derivative losses unlikely to affect Indian banks' ratings Credit outlook for the Indian banking system is stable
Global credit quality worsens in first quarter 2008
Current challenges in the global financial markets
Highest levels of political and economic uncertainty in 2008
No immediate threat to financial stability in India

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