Foreign branches and subsidiary companies of Indian banks have a collective exposure of around $1 billion in the five troubled foreign financial giants – US banks Wachovia and Washington Mutual (WaMu), the largest US insurer American International Group (AIG), Belgium's Fortis and US investment bank Lehman Brothers - the financial daily Business Standard reported today.

The report says that though the collective marked-to-market (MTM) losses of Indian banks were estimated in the range of $450 million at July end, the Reserve Bank of India (RBI) now believes that these losses are notional, and would arise only in the event of the counter-party payment refusals. The RBI is reported to be monitoring the impact on the spreads of Indian banks, and has said that there is no immediate cause for worry, as other than Lehman Brothers, all the troubled entities have been bailed out.

RBI's data says that the marked-to-market loss for public sector banks had been estimated around the ballpark of $90 million whereas private banks had a larger exposure of around $360 million at the end of July 2008.

The report said that Indian banks do not have any direct sub-prime exposure, thought there is some to collateralised debt obligation (CDO) and credit default swaps (CDS). Lehman Brothers accounts for around $330 million of the total exposure, with the remaining institutions have either been bailed out, or have merged with other viable institutions.

It quoted RBI's deputy governor Leeladhar as saying that the total exposure and the marked-to-market losses were small on account of the size of the balance sheets of Indian banks.

The RBI, with the cooperation of the Fixed Income Money Markets and Derivatives Association had managed to get eight Indian banks to settle exposure to Lehman's interest rate swaps in domestic transactions. The net settlement amount was Rs50 crore, which was paid out by Lehman.

ICICI Bank's exposure to the five troubled institutions was estimated at $230 million with no direct exposure to US mortgage lenders Fannie Mae and Freddie Mac, though it did have an exposure of over $100 million to Morgan Stanley, which has converted itself into a bank holding company since the financial crisis hit. The investments were made by ICICI's subsidiaries, and the bank itself has no direct exposure, the report said.

On 10 October, in a statement on its website, RBI Governor Dr Duvvuri Subbarao had said that the fundamentals of the Indian economy continue to be strong, and that the Indian banking system is sound, well capitalised and well regulated. He said India's forex and money markets have been functioning in an orderly manner, while clarifying that as per information with RBI, Indian banks do not have any direct exposure to sub-prime mortgages.

Subbarao said that the banking sector, through its overseas branches, has some exposure to distressed financial instruments and troubled financial institution, though this exposure is part of the normal course of business and is quite small relative to the size of their overall business. He said the present scenario on the Indian markets is an indirect, knock-on effect of the global financial situation, and is only a reflection of the uncertainty and anxiety in the global financial markets.

The Reserve Bank of India governor said the central bank had taken action to inject liquidity into the system as warranted by the situation, and is monitoring the situation on a continuous basis, standing ready to take appropriate effective and swift action.

Addressing the IMF-Financial Stability forum meeting recently, RBI Deputy governor Rakesh Mohan said that an analysis of information reported by banks revealed that majority of the exposures reported by the banks pertained to subsidiaries of Lehman Brothers, which are not covered by the bankruptcy proceedings. He said that the bank's exposures, especially to Lehman Brothers which has filed for bankruptcy, is not significant and banks are reported to have made adequate provisions.

Of 77 reporting banks, 14 reported exposures to Lehman Brothers and related entities in India or abroad.