Corporates with large derivative exposure a concern: CFSA

Corporates assuming large derivative exposure without adequate prudential accounting and disclosure norms pose a challenge to the banking system, an apex committee on financial sector has said.

"The propensity of some corporate participants to use derivatives to assume excessive leverage coupled with the lack of prudential accounting and disclosure norms remains a significant concern," the Committee on Financial Sector Assessment (CFSA) has said in its report.

"This (banks' large derivative exposure) makes it difficult to gauge the quantum of market and credit risks that banks face in this regard."

Regulators should have a better understanding of the off-balancesheet liabilities of banks and there should be better co-ordination with accounting standards and disclosures, it said.

Off-balancesheet exposure of Indian banks, particularly of private and foreign ones, has increased significantly in the recent years, the CFSA said.

The ratio of off-balancesheet exposure of Indian banks to total assets rose from 57 per cent as at the end of March 2002 to 363 per cent at end March 2008, which amounts to Rs 1,49,69,000 crore (notional principal amount), the report noted.