BoB provisions for sub-prime losses

Indian banks have started experiencing the ripples of the US subprime crisis. While ICICI Bank is provisioning an additional $70 million (around Rs 280 crore) to cover its losses on exposure to credit derivatives, Bank of Baroda today said it will provision an additional $2.50 million (around Rs 10 crore) for its investments in Credit Linked Notes (CLNs).

CLN is a form of credit derivative issued overseas for bonds floated by Indian companies. The total investment of the bank in CLNs was $330 million (around Rs 1,300 crore) at the end of December 2007.

The full provisioning has been made in accordance with prescribed norms of mark-to-market. The bank has already made provision of $2.8 million (around Rs 11 crore).

If these investments are marked to market as of February 29, 2008, there would be an additional provision of $2.50 million, as credit spreads have widened.

A credit spread is the difference in yield between two debt issues of similar maturity and duration. It may be quoted as a spread to a benchmark floating-rate index such as Libor, or as a spread to a highly-rated reference security such as a government security.

The credit spread is often used as a measure of relative creditworthiness, with reduction in the credit spread reflecting an improvement in the borrower's perceived creditworthiness.

The public sector bank has, meanwhile, clarified that it does not have any exposure on Collateralised Debt Obligations (CDOs) and Credit Default Swaps (CDS) in overseas territories as in the case of ICICI Bank.

Earlier, ICICI Bank had said it would have to make an additional provisioning of $70 million in the current quarter for MTM losses on exposure to credit derivatives of its overseas branches and subsidiaries, with spreads widening further on continuing impact of the sub-prime crisis.

The total depreciation losses as on January 31, 2008, on CDOs and CLNs held in its overseas operations amount to $264 million.