There's been a lot of interest in credit derivatives in India because it does take Indian financial markets to the next stage of evolution. It's important to have these instruments to provide transparency, depth, liquidity and to avoid concentration of risk. Credit risk, one of the biggest risks of the financial system, poses a great challenge to banks and bond investors at times when the borrower is in default. Nevertheless, an effective management of credit risk largely aids in enhancing the efficiency and resilience of the financial system of any economy. To serve this very purpose, credit derivatives have globally emerged as a potential risk management tool for banks, financial institutions and bondholders.
According to the International Swaps and Derivatives Association (ISDA)'s report, the global market for credit derivatives has more than doubled in size for the third consecutive year. The notional amounts outstanding at the end of 2006 grew by leaps and bounds from a meager $632 bn in 2001 to $34.5 tn in 2006. After witnessing the phenomenal success of credit derivatives globally, RBI has recently proposed to introduce them in India also, albeit in a calibrated manner. The move, which will help banks and primary dealers to hedge against loan defaults, is poised to largely reduce the risk of default in the Indian financial system. |
