PSBs reviewing limits with pvt banks

As a measure of abundant caution, PSBs are now reviewing the balance sheets of weak banks in order to rework their counterparty risk exposure limits in the money and foreign exchange markets.

This move comes close on the heels of the moratorium being imposed on Global Trust Bank and crisis gripping the South Indian Co-operative Bank.

Counterparty exposure limits are set by a bank on its money (call and term) and forex (spot and forward) market dealings with other banks. The limits are set with a view to reducing the risk of a counterparty not honouring its contractual obligations.

A treasury head with a public sector bank confirmed that a ‘‘quick review’’ of counterparty limits was carried out by going through the financials of weak banks with a fine tooth comb. This was done after the Reserve Bank of India (RBI) made the perilous financial condition of GTB public.

‘‘This review was basically carried out in order to scale down our exposure to the financially unsound banks. We’re just being cautious. The call money exposure of banks to the beleaguered Ahmedabad-based Madhavpura Mercantile Co-operative Bank and the pay-order scam involving this bank are still fresh in our memory,’’ said another banker.

As part of this exercise, banks are also trying to ensure that exposure to the weak banks on account of bill discounting and discounting of letters of credit comes down substantially.

Banks factor in the strengths and weaknesses of other banks before arriving at counterparty limits.

The factors that are taken into account for drawing up the limits include capital adequacy, net worth, asset quality, management quality, earnings, liquidity, sensitivity to market risks, return on capital, return on investments, etc.