BoB to set aside funds to offset losses

6 Mar, 2008, 0053 hrs IST, TNN

MUMBAI: A day after ICICI Bank announced its mark-to-market loss due to credit derivatives exposure, Bank of Baroda (BoB) has clarified that it will make additional provisioning of Rs 10 crore. This is on account of a total investment of $329 million (Rs 1,296 crore) in credit-linked notes — a product that is similar to bonds with the features of credit default swaps (CDS).

The public sector bank had provided $2.80 million (Rs 11 crore) as on December 31, 2007. According to a statement issued on Wednesday, the bank will have to make an extra provisioning of $2.50 million (Rs 10 crore) if the investments are mark-to-market against February 29, 2008 prices.

However, sections in the industry wonder whether the provisioning is adequate, given the way spreads have moved. BoB general manager for international operations RK Garg, “The provisioning amount of $2.5 million is what we have arrived at after proper calculations. We did this to clarify our position and had no necessity to do so in the middle of the quarter.”

The bank said its exposures to credit-linked notes (CLNs) are linked to papers issued by Indian corporates or banks. CDS spreads for Indian papers have widened significantly over the past few months.

For instance, the CDS spreads of Reliance Industries are currently at 200 basis points above Libor against 95 basis points around three months before. Tata Motors is currently trading at 475 against 280 three months before. The CLN spreads are higher than the CDS spreads as they also include funding costs for the company.

According to a statement issued by the bank, it does not have any investments, it does not have any exposure to collateralised debt obligations (CDOs) and credit default swaps (CDS) — which have exposure to US subprime market.

Other state-owned banks with overseas operations are State Bank of India and Bank of India. Of these, SBI’s exposure to credit derivatives and credit linked products is estimated to be close to $1 billion. Senior officials of SBI are currently on a roadshow in the US for its rights issue and refused to comment.