SOVEREIGN RISK

• Political, legal and other risks associated with cross border payments.
• The risk that a foreign central bank will alter its foreign-exchange
regulations thereby significantly reducing or completely nulling the
value of foreign-exchange contracts.
• Various credit rating agencies are rating countries based on various
parameters.
• It is necessary that bank restricts exposure on countries based on a
country risk exposure policy.
• RBI has issued instructions to banks to formulate and adopt an internal
country rating model and fix exposure limits on countries.
• Guidelines on country risk management are approved by the Board on
an annual basis.
• We have adopted the country risk classification followed by ECGC.
• Funded and non funded exposures taken on individuals, banks and
financial institutions in and outside India directly or indirectly will recon
for ascertaining the total exposure to a country.
• Funded exposures will include bank balances, investments loans and
advances, trade credits, overdrafts in vostro accounts, remittances under
drawing arrangements
• Non funded exposures will include confirmation of LCs issued by foreign
banks, commitments undertaken against counter guarantees of foreign
banks and others.
• Indirect country risk exposure; e.g packing credit to domestic exporter
with large dependence on a particular country.
• Exposures also classified as short term (up to 6 mts and less) and long
term exposure
Countries classified into following risk categories;
 1. Insignificant
2. Low
3. Moderate.
4. High
5. Very high
6. Restricted
7. Off credit.
• Limits are given to each country based on the risk category, as a certain
percentage of our capital funds.
• No ceiling on exposure to insignificant risk countries whereas exposures to
Off category countries cannot be taken except under certain circumstances.
• Limits are also placed on the total exposure to all countries in a particular
risk categories.
• Counterparty limits for exposure on Foreign Banks are fixed after making
adjustments for country risk
• Exposures to countries under “High Risk” and beyond to be of short-term
nature only.
• Exposure under project / deferred exports and services to be within the sub-
ceiling of 50% of the country-wise/category wise limits.
• Location of the risk will be the criteria disregarding the location of the
principal office of counterparty concerned.
• Exposures will be computed on net basis i.e. gross exposure minus
collaterals, guarantees, credit insurance available from countries in a lower
risk category.
MONITORING OF EXPOSURE;
• All “A” and “B” category branches to forward statement of country wise
exposure on the given format to IBD on a weekly basis.
 • IBD monitors the exposure and ensures that the same are within the limits
fixed.
• In case of breach of limits IBD will issue instruction to restrict exposure on
the particular country.
• Details of the country wise exposures are placed before the Board of
Directors on a quarterly basis.
PROVISIONING AS PER RBI NORMS;
• Bank will make provision for country risk exposure only in respect of
country where the net funded exposure is 1% or more of its total assets.
• Amount of provision as a percentage will depend on the risk category of the
country.
• Lower provision of 25% of the requirement will be made in respect of short-
term exposures.
• Provision to be made in addition to the provisions made according the asset
classification. However total provision need not exceed 100%
DEFINITION
• Multinational financial firms operating in the host country needs to
acknowledge, identify, measure, manage and monitor the risks arising from
adverse events: political, economic, financial and social within the country.
• Country risk is the risk that a firm’s financial performance and interests are
adversely affected by events and uncertainities in political climate,
economic situation, financial condition and social institution within the host
country.
• Sovereign risk is the risk that the host government may default or repudiate
its foreign payment obligations or may prevent local firms from honouring
their foreign obligations.
• Mostly the sovereign risk analysis is a subset of country risk analysis.
• Both analysis requires substantial judgement based on rating agency’s
knowledge and experience of the host country.
IMPORTANT FACTORS OF COUNTRY RISK
• Factors affecting CR can be classified into four broad groups:
1. Political climate
1. Stability, maturity, and functioning of the political system
2. Representativeness and collectiveness of the government
3. The scale of domestic conflict: racial relations; civil war or
insurgence; conditions of international relations-sanctions
imposed due to political reasons, border disputes or military
conflict with neighbouring countries.
2. Economic environment
1. Economic development stages: GDP growth; GDP per capita;
2. Economic stability: inflation, Unemployment and provision of
social security.
3. Infrastructure: Functioning of communication system; skills of
labour force; competetiveness of the industry; maturity of the
service sector and efficiency of governmwent departments and
agencies.
4. Taxation: consistency in tax charges; tax levels; tax incentives
for foreign investment and industries
5. Macroeconomic Management: Formulation, implementation
and efficiency of monetary policy and fiscal policy.
6. International Economic relations: International trade; Balance
of payments; Exchange rate arrangements; and level of foreign
exchange reserves.

3. Financial conditions
1. Stability, Regulation and supervision of the financial system
 2. Capital market functioning: efficiency, liquidity, resiliency and
transparency of the capital market
3. Operation of Foreign exchange market: Stability, resilience
and central bank intervention.
4. Corporate sector: Maturity, information disclosure and
Corporate governance
4. Social Institution
1. Legal system: independence, Transparency and enforcement;
crime and security in the society
2. Legislations and Regulations: Consistency, fairness and
Effectiveness
3. Work organization and corporate governance: Functioning,
compatibility and harmony
4. Influence of Interest groups- professional groups, trade unions
and employers organizations
5. Emergencies and Rescues: Occurrences of natural disasters
and major accidents and the ability to these and emergency
rescues
6. Social attitude towards work, social life, wealth distribution,
foreign investment and national interests.

ANNR
30.06.0
9
 Grou
Country p Funded Exposures
Amount
in Rs.
Loan
Depos s Trade
Bank it Inves And Credits /
Balance Place tment adv Receivabl Tota Tot Grand
s ments s . es l al Total

Australia A1 - - 0 -

Chile A2 - - 0 -
14,
085,
2362494 11,723,3 798. 14,08
Germany A1 .3 04 35 0 5,798.35
6,
580,
6,580,6 644. 6,58
Israel A2 44 00 0 0,644.00

330,
330,2 221. 33
Italy A1 21 00 0 0,221.00

300,
300,472. 472. 30
Japan A1 30 30 0 0,472.30
3,
604,
3,604,0 000. 3,60
Mexico A2 00 00 0 4,000.00
47,
252,
Singapor 47,252,0 000. 47,25
e A1 00 00 0 2,000.00

Slovakia B1 - 0 -

Slovenia B1 - 0 -
Solomon
Islands C1 - 0 -
South A2 1,164,7 1, 0 1,16
Africa 37 164, 4,737.00
 737.
00
1,
789,
1,789,0 000. 1,78
Turkey B1 00 00 0 9,000.00
1,
363,
United 1,363,44 447. 1,36
Kingdom A1 7 83 0 3,447.83
33,
United 821,
States of 30,883,5 2,937,4 036. 33,82
America A1 72 64 65 0 1,036.65
Zimbabw
e C1 - 0 -

Country Risk Analysis:

Country Risk Limits have been assigned to each country and group of risk category
country.

As on June 30, 2009, the highest exposure of the Bank was on the Singapore at
Rs.4.73 crores. Singapore falls in the insignificant risk category. The list of country
exposures is enclosed in Annexure for ready reference.

It can be ascertained from the country exposures that neither the Individual Country
wise exposures nor Exposure to a Country Risk Category limits have been breached.

Further, the net funded exposure to Singapore (country with highest exposure),
does not exceed 1% of the total assets i.e. Rs. 52.86 crores, as on 31-03-2009
hence no provisioning is required.