Disclosures about exposures

Set against the total liabilities (that is, deposits, borrowings, and other liabilities and provisions) of Stanchart's Indian branches amounting to Rs 34,052 crore, the exposure towards forward and derivative contracts works out to 750 per cent. For HSBC's Indian branches, it is 823 per cent, and for ABN AMRO, a whopping 1,156 per cent. It would be insightful, therefore, to attempt a similar exercise vis-à-vis the net worth of the banks, and also for the year ended March 31, 2006, says D Murali in this article in Business Line.

- Dilip.

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Source: Business Line, 13-07-2006

Standard Chartered Bank's Indian branches account for the maximum total liability on account of outstanding forward and derivative contracts. The amount as at end-March 2005 is Rs 2,55,403 crore, as per data analysed by Global Data Services of India Ltd, Pune, culled from disclosures under contingent liabilities. Forward and derivative contracts are roughly in the ratio of 2:3. And, set against the total liabilities (that is, deposits, borrowings, and other liabilities and provisions) of the bank, amounting to Rs 34,052 crore, the exposure towards forward and derivative contracts works out to 750 per cent.

But there are larger relative exposures that the analysis reveals: For HSBC's Indian branches, it is 823 per cent, and for ABN AMRO, a whopping 1,156 per cent.

In terms of a ranking by absolute exposure, ICICI Bank comes second with a total liability towards outstanding forward and derivatives contract adding to Rs 2,34,702 crore. However, this is only 152 per cent of total liabilities of the bank. With a 288 per cent exposure, HDFC Bank leads the Indian banks, though occupying a distant fourth spot in a ranking by leverage, after the 750 per cent exposure of Standard Chartered.

IDBI and Bank of India appear to be the most conservative in the list, with a forward and derivative exposure of 69 per cent and 75 per cent of total liability respectively. At 137 per cent and 210 per cent, UTI Bank and Kotak Mahindra Bank had a larger exposure, though ranking last among the nine banks.

No wonder, therefore, that the Reserve Bank of India spoke in its recent discussion paper on `Derivative and Hedge Accounting by Banks' about the growing complexity, diversity and volume of derivative products. There is an "urgent need for adoption of uniform principles for recognition, classification, measurement and disclosure of derivatives and their inherent risks in banks' books of accounts and financial statements," the central bank had said.

It would be insightful, therefore, to attempt a similar exercise vis-à-vis the net worth of the banks, and also for the year ended March 31, 2006.

D. Murali