Will the Minister of FINANCE be pleased to state:-

(a) the quantum of derivatives trading and exposure on Indian stock market by Indian banks with their own capital during the last three years ending 3 1st December, 2007, year-wise and bank-wise, and

(b) what systematic safeguards are in place to prevent the recurrence of any large scale losses arising from derivatives trading like the one recently reported in France by Societe Generale?

ANSWER

The Minister of Finance

(Shri P. Chidambaram)

(a) & (b) : A Statement is laid on the Table of the House.

Annex 1

(In Crores)

STATEMENT FOR RAJYA SABHA STARRED QUESTION NO. 166 FOR 11th MARCH, 2008 REGARDING DERIVATIVES TRADING BY INDIAN BANKS TABLED BY SHRI RAJEEV CHANDRASEKHAR

(a) As per the extant guidelines of Reserve Bank of lndia (RBI), equity derivatives are not in the list of permissible derivative instruments that may be transacted by the banks. Bank-wise statements indicating total outstanding notional principal amount of derivatives and outstanding direct investment by Indian banks in capital market for the last three years as at end December 2005, 2006 and 2007 are at Annex I and Annex 1I respectively.

(b) To provide a framework for undertaking derivatives transactions from a regulatory perspective, RBI has issued comprehensive guidelines on derivatives on 20t~ April, 2007 enunciating the broad principles and major requirements for undertaking derivative transactions, such as the participants, purpose, eligibility criteria to undertake such transactions, permissible derivative instruments / products, etc. The guidelines also set out basic principles of a prudent system to control the risks arising out of derivative transactions as .also on corporate governance aspects. As per these guidelines, the banks have to put in place a Board approved policy framework for derivative transactions, to ensure, inter-alia, that the policy is consistent with the strategic objectives, capital strength and management capabilities of the institution, to hedge or transfer risks effectively, efficiently and expeditiously. RBI has been vested with extensive powers of supervision, regulation and control over the commercial banks through the Banking Regulation Act, 1949 and the Reserve Bank of India Act, 1934. The main instruments of supervision and monitoring over the banks are through `On-site inspection` and `Off-site monitoring and surveillance`. During On-site inspections, RBI assesses the adherence by the banks to the regulatory guidelines on risk management systems as well as their ability to identify, measure, monitor and manage all types of risks, besides the adequacy and effectiveness of the internal controls and systems in the bank.