Indian Banks' U.S. Credit Exposure Is Minimal

Most investors here do not know that India's largest government-controlled banks -- State Bank of India, Bank of India and Bank of Baroda -- and private-sector bank ICICI Bank (IBN - commentary - Cramer's Take) do have collateralized debt obligation (CDO) and credit default swap (CDS) exposure, but 70%-75% was linked to Indian corporations.

ICICI had the most exposure with $1.5 billion in total CDO and CDS investments and took a $25 million writedown in the September quarter, but that writedown was more than offset by other treasury income of $75 million to $100 million.

I believe ICICI will take an additional writedown of 5% to 10% in the December quarter as well, and then that should be a done deal as far as IBN is concerned.

State Bank of India has a $1 billion portfolio of CDOs/CDSs. Bank of India has $300 million worth of exposure. Bank of Baroda has $150 million worth of CDO/CDS exposure, but it has very limited exposure to American companies.

The Reserve Bank of India stated in its latest progress report on Indian banking sector that some Indian banks with overseas exposure had some exposure to credit derivatives and could face some losses due to mark-to-market impact. However, the Indian central bank stated that exposure was very limited and that the Indian banks did not have any direct exposure to the U.S. subprime market.

CDOs are securities backed by pools of other securities and bought by investors wanting exposure to the income from a set of loans or bonds but not direct exposure to them.

CDS is an agreement whereby a lender transfers a credit risk to a counter-party, like another bank or a pool of investors, which agrees to insure the risk and receive periodic payments like an insurance premium.

If the lenders' client or the borrower defaults, then those banks/investors that issued the CDS pay the lender the outstanding principal and any remaining interest owed and becomes the owner of the defaulted securities.

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At the time of publication, Somaney was long IBM, IBN calls and IBN in India, although positions may change at any time without notice.

Jay Somaney is a partner and fund manager with TSG Capital Partners, a hedge fund based in Plano, Texas, and founder of GlobalTechStocks.com. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Somaney appreciates your feedback; click here to send him an email.