IDBI Bank underwrites first credit default transaction

IDBI Bank Ltd. | Bank - Private | BFSI | BSE: 500116 | NSE: IDBI

08 Dec 2011 Evaluate

IDBI Bank, becoming the first public sector bank to underwrite credit default swap (CDS) transactions for managing credit risks associated with Indian corporate bonds, sold the first credit protection, or credit default swap to ICICI Bank. It has underwrote two credit default swap transactions in respect of Rural Electrification Corporation (REC) and Indian Railway Finance Corporation (IRFC) bonds held by ICICI Bank worth Rs 5 crore each at spreads of 99 basis points.

The bonds which are covered under the credit default swap are ten-year, AAA-rated infrastructure bonds issued by REC and IRFC respectively.

CDS offers credit protection to corporate bond buyers, as the sellers of the swaps guarantee the credit-worthiness of the product. Thus, the risk of default is transferred from the holder of the fixed income security to the seller of the swap. The launch of CDS will help transfer the credit risk, which will release capital charges. This will in turn help banks to efficiently utilize their capital and improve risk adjusted returns on capital, since provisions will lower as risk gets transferred to the counter party.