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Forex derivative losses unlikely to hit Indian banks' rating
June, 06th 2008

Fitch Ratings on Thursday said Indian banks' equity was unlikely to be affected by mark-to-market losses in forex derivative contracts of corporates.

The MTM losses "in structured and exotic foreign exchange (forex) derivative contracts of corporates are unlikely to affect the equity of Indian banks," Fitch said in a press release issued here.

It estimates total MTM losses of corporates on forex derivatives to be currently in the range of $3 billion to $3.5 billion.

According to Fitch, the "more vulnerable" SME segment accounts for about 25 per cent of these losses, and some of these could turn into actual losses for banks on account of defaults or disputes with corporates.

"The concentration risk is higher among larger corporates, but the likelihood of default here is expected to be low," Fitch said.

While Indian banks would be able to absorb even large-scale defaults from the SME segment as these represent only about a quarter of the total losses, "the key risk could arise from any default by larger corporates, given the big-ticket size per client," Fitch said.

The larger corporates, however, have superior financial flexibility as well as a high inclination to protect their reputation and maintain healthy relationships with their bankers, Fitch's Financial Institutions team's Senior Director Ananda Bhoumik said.

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