RBI asks banks to unwind Lehman exposure

Mumbai: The Reserve Bank of India (RBI) has advised banks to unwind their interest rate swap (IRS) transactions with Lehman Brothers, even as the 158-year-old investment banking giant's market loss over the past year exceeded the combined market loss of all Indian banks put together for the same period.

The plunge in Lehman's share price to sub-one dollar mark has wiped off over $44 billion from its market value over the past one year, against the combined loss of  $30 billion of all Indian banks put together.

The RBI had also convened a meeting of banks to this week to ascertain Lehman's exposure in the local IRS market, bankers said.

Many Indian banks have deals such as interest rate swaps with Lehman and the  banks have hence decided to handle the matter collectively. Some banks even suggested scrapping of all deals with Lehman.

Since no consensus could be arrived at the meeting on currency exchange issues and Foreign exchange issue, RBI had convened another meeting next week.

RBI, meanwhile, barred Lehman's Indian primary dealership from undertaking transactions in government securities.

It had also said Lehman Brothers Capital, a non-banking financial company, would need prior approval from the central bank before contracting any direct or indirect liability from any institution in India or abroad or making any foreign currency remittance.

The central bank has also allowed banks to raise money from rapo window instead of borrowing directly from the market.

Lehman, once the fourth-largest US investment bank, filed for bankruptcy protection this week, having collapsed under the weight of its exposure to the subprime mortgage-related securities.

RBI, however, said ''It is a bilateral issue. As a market regulator, we are interested in the market functioning in a smooth and orderly manner. And, therefore, we are facilitating it."

Banks are expected to unwind the IRS transaction by cancelling the position with Lehman and covering the transaction with a fresh counterparty.

The 158-year-old Lehman Brothers'  share price over the past year has come along a bear-run across all the equity markets, especially for the financial sector stocks, including in India.

In comparison to Lehman's $44.2-billion loss in the past one year, the cumulative market value of all the listed banks in India has dropped by just about $30 billion during the same period.

In percentage terms also, Lehman's shares have plummeted by 99.5 per cent from $64.5 in mid-September to a current level of just $0.3. During the same period, the BSE Bankex, which tracks share prices of Indian banks such as ICICI Bank, SBI and HDFC Bank, has lost about 20 per cent.

While Lehman Brothers' market cap has dropped from $44.4 billion to just $206 million during this period, that of all Indian banks together has dropped from about $102 billion to about $72 billion.

The Indian market has lost close to $300 billion in past one year - dipping from about $1.2 trillion to about $900 billion currently.

Meanwhile, the department of industrial policy and promotion (DIPP) and the Reserve Bank will shortly meet to evaluate the the US giant's $500-million investment in Indian real estate projects.

Foreign investment norms for real estate do not allow repatriation of funds within three years of investment. The RBI-DIPP meeting will discuss a mechanism to deal with cases like Lehman, when foreign investors in real estate go bust.