Why Should All the Eurobonds Issued by Indian Banks Carry Uniform Regulatory Credit Risk Charge?

Abstract

Credit risk charge is a major component of capital charges against investments in Eurobonds by an Indian commercial bank (henceforth “bank”): (i) market risk capital charge and (ii) credit risk capital charge. Basel II guidelines gave country regulators the freedom to decide the credit risk weights of bonds issued by banks. The Indian banking regulator Reserve Bank of India assigned a 20 per cent credit risk charge of investments in corporate bonds issued by any other bank. This was in place for quite a long time and across all banks. But credit risk varies from time to time and from issuer to issuer. This chapter seeks to sensitize the investing banks as also the regulator regarding the changing magnitudes of driver factors determining credit worthiness of a bank in terms of credit quality and credit score during the post-crisis period. A credit risk manager may assess the counterparty-default probability, looking at the credit rating of the instrument, not the issuer, as per the regulatory norm. Therefore I have chosen the two jointly largest Eurobond issuers banks in terms of outstanding amount in USD, as comparative examples. These are ICICI Bank and State Bank of India (henceforth “SBI”). Each has a liability of 1000 million USD outstanding from a single issue in the Asian offshore market. In the beginning of the financial year April 2012-March 2013 1000 USD is the largest denomination of a single issue.