Credit Derivative - an Alternative Tool for Indian Commercial Banks to Transfer Credit Risk

Profitability of a bank depends on efficient and effective credit risk management. The result of inefficient credit risk management of Indian banks (Public and private sector) is Non Performing Asset (NPA). The origin of the problem of NPAs of commercial banks in India lies in the quality of managing credit risk of the banks and it has been of foremost concern for the policy makers, as they sway the profitability of a bank. Further, performance of banking sector is affected, ultimately affecting the economy. Though many tools are used to minimize risk, they are traditional and ineffective. There is an increasing focus on credit derivatives in the global scenario, helping the banks to manage credit risk which can be applied to the Indian banking system for nullifying future NPAs. At this juncture, RBI's role is crucial in facilitating and promoting credit derivative as an instrument for risk management and investment. This paper focuses on causes&consequences of poor credit risk management, NPAs, credit derivatives, need for credit derivatives in Indian banking, viability of credit derivatives in Indian financial markets, role of RBI in promoting credit derivative market as an alternative solution for credit default risk and important factors contributing to the success of credit derivatives market in India.