The arrest of eight Indian bankers and brokers following a bribery probe triggered the biggest daily jump in benchmark credit-default swaps since June amid concern investigators will find evidence of bad loans.
Five-year swaps on State Bank of India, the nation’s largest lender and a proxy for the government, climbed 10 basis points to 172 on Nov. 24, the biggest increase for four months, CMA prices in New York show. While no one from State Bank was named, the Central Bureau of Investigation said it seized officials from firms including LIC Housing Finance Ltd., Life Insurance Corp. of India, Bank of India, Central Bank of India and Punjab National Bank.
“Other banks could be involved, that’s the nervousness,” Brian Hunsaker, an analyst at Keefe, Bruyette & Woods Asia Ltd., said in a phone interview from Hong Kong. “There’s a lot of volatility on these prices.”
The allegations of improper loan disbursals to property developers may damage investor confidence and lead to “some derating” of public sector banks, Citigroup Inc. analysts including Manish Chowdhary said in a Nov. 24 report. Credit swap prices rise as perceptions of creditworthiness decline, and may signal rising borrowing costs for India’s banks as they try to meet demand for credit in a $1.3 trillion economy forecast to expand 8.5 percent this year.
Swaps on ICICI Bank Ltd., the second-largest lender, have risen 10 basis points since Nov. 23 to 205 yesterday while those on Bank of India climbed 11 basis points to 175, CMA prices show. Default swaps of Tata Motors declined 0.6 basis points to 271.3.
Indian bank creditworthiness has improved faster than rivals in China and Russia this year. Credit swaps on State Bank of India have fallen 55 basis points in the past six months, compared with 40 basis points for Bank of China Ltd. and four basis points for Sberbank, the biggest in Russia.
Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent should a borrower fail to adhere to its agreements. A basis point, or 0.01 percentage point, equals $1,000 annually on a contract protecting $10 million of debt.
Swaps on State Bank fell 2 basis points to 170 basis points in New York time yesterday after Chairman O.P. Bhatt said in New Delhi that there’s “no need to be alarmed” by the housing loan enquiry. ICICI, Bank of India and State Bank are based in Mumbai.
The Reserve Bank of India said in its weekly statistical supplement on Nov. 19 that bank credit grew by 6.37 trillion rupees ($140 billion), or 22 percent, from a year earlier as of Nov. 5. Non-performing assets after deducting bad-loan provisions were 1.1 percent of total loans as of March 31, the central bank said in a report on Nov. 8.
“India is easily one of the most regulated as far as the banking system is concerned,” said Jagannadham Thunuguntla, the New Delhi-based chief strategist at SMC Global Securities Ltd., in an interview. “The movement in credit-default swaps is more a kneejerk reaction.”
LIC Housing, based in Mumbai, will take the necessary steps to safeguard interests of stakeholders, it said in an e-mail yesterday. Bank of India, a state-run lender, began reviewing loans to companies named, Chairman Alok Kumar Misra said. Chairman of Mumbai-based Central Bank of India S. Sridhar said in an interview he had “no reason to believe this will affect the bank.”
“It looks serious,” said Morten Groth, an emerging-market bond manager at Jyske Bank A/S in Silkeborg, Denmark. “I am not aware of the proportion of this case but these type of stories come in emerging markets from time to time.”
Life Insurance Corp. of India is looking into its investment processes, Chairman T.S. Vijayan told Bloomberg UTV yesterday. K.R. Kamath, chairman and managing director of Punjab National Bank in New Delhi, wasn’t available for comment.
Elsewhere, in the corporate bond market, the difference in yield between India’s top-rated five-year rupee company debt and similar-maturity government bonds widened to 64.8 basis points from 63.7. The gap has shrunk from 86 at the start of the year.
India’s rupee declined 0.8 percent this week to 45.66 per dollar, according to data compiled by Bloomberg. The currency will appreciate to 43.5 per dollar by December 2011, according to the median forecast in a Bloomberg survey of 15 economists.
The yield on the 7.8 percent note due May 2020 declined four basis points to 7.97 percent today, according to the central bank’s trading system.
The Indian 10-year yield has dropped from a two-year high of 8.18 percent touched last month as slowing inflation lured buyers. The yield is still 507 basis points above Treasuries of similar maturity.
India’s food inflation slowed for the sixth week to a 17-month low, a trade ministry report showed yesterday. An index measuring wholesale prices of agricultural products including lentils, rice and vegetables rose 10.15 percent in the week ended Nov. 13 from a year earlier. The index gained 10.30 percent the previous week.
Indian local-currency debt returned 4.3 percent in 2010, according to indexes compiled by HSBC Holdings Plc, as the Reserve Bank of India raised borrowing costs by 150 basis points to 6.25 percent. Investors in China earned 1 percent, the least in the region, the indexes show.
India asked banks to review their exposure to loans given to companies named by the federal investigating agency, an e-mailed statement from the finance ministry yesterday said.
The capital markets regulator is taking steps to protect investor confidence and will investigate any “unusual market activity,” Prashant Saran, a member of the Securities and Exchange Board of India, told reporters in New Delhi today.
“What’s important is how the authorities will act now,” Groth said, referring to the inquiry. “I expect them to do the necessary steps to calm down the unrest to ensure credibility.”