ICICI Bank stood accused this fortnight of having overleveraged their exposure to the devastating sub-prime market, consequently endangering their very existence... 4Ps B&M proves otherwise...

But let’s dig further to find out what actually are these so called sub-prime losses. The fact is, ICICI Bank’s ‘losses’ are not at all sub-prime losses but as mentioned before, Mark-To-Market (MTM) losses! While sub-prime loss is a loss on a loan given to a non-prime (risky) borrower, in Mark-To-Market losses, the investments have to be adjusted on current prices. So, when there’s a downturn in the financial markets that brings down the prices of instruments, it’s reflected in the books of the company as MTM losses (as current prices fall). As shared with 4Ps B&M by Rajesh Mokashi, Executive Director, CARE, “MTM losses for ICICI Bank could be notional only as many of these instruments might actually be held till maturity; and if so, the MTM losses will be reversed.” In other words, this means that these losses are only temporary and stay to the extent markets stay down. Moreover, if ICICI Bank holds these investments till maturity – which any sane banker should – the complete amount of the investment will be recovered.

And what if the debtor doesn’t pay up? For sweet mercies, the complete portfolio of the bank is secured against collaterals, as mirrored by Prabhudas Lilladher’s Ashok, “I think too much is read into this issue. These are loans to corporates which are structured as investments and are backed by collateral assets in India. These losses may be notional and stand good chances of recovery over time.” In many ways, these voices cement the fact that ICICI Bank’s losses do not stand any chance of denting the bank and it’s only a matter of time that ICICI Bank comes out of it absolutely clean.

The fact is that Indian banks still live inside the barbed wires drawn by our central bank – the Reserve Bank of India. So, in an instance where the legitimacy of activities are being questioned – the case in point being the ‘so called’ subprime exposure – the breathing space offered by the RBI anyway is very less in the first place itself. So, the question of ICICI Bank being “blatantly aggressive,” especially in the case of such lending, falls flat on its face. In such a scenario where guidelines are already palmed out by the regulator, the so called ‘exposure’ or lack of it is more a responsibility of RBI than of the particular bank in itself.

Bimal Jalan, former Governor of RBI explains the same along with a word of caution, “Integration with international markets is unavoidable; participation of our banks is commendable; but at the same time, assessment of risks has to be strict,” which is something that is RBI’s, and not other banks’ responsibility. Frankly, if ICICI Bank has to be accused of something, that should be of teaching Indian banks the way to beat global benchmarks, create world-class service standards, to show to India Inc. what is the true meaning of visionary growth. Surely, they stand convicted of all these accusations!


Bikram K Jena, with inputs from Pallavi Srivastava


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Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam Chaudhuri (Renowned Management Guru and Economist).


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