In a bid to regulate international operation of Indian banks, RBI has declared that overseas branch of the Indian banks need to seek its approval to deal in structured financial products. Until now these branches were regulated under the guidelines of the host country.

However the regulator has spell out that foreign branches or subsidiaries of Indian banks that are already dealing in simple financial products do not require the prior approval.

As per the new directives, the foreign branches will be required to provide full details of these products. They will have to give information relating to regulatory treatment involving capital adequacy, valuation, pricing, exposure norms and the like as set by the host country's regulator. This move by RBI is known as the cross-border supervision.

Following the sub-prime crisis, foreign branches of several banks have made provisions of their exposure to structured products in the markets of US and UK that are primarily hit by the crisis and sources from the banking industry feel that RBI has laid down its control over the products and activities of foreign branches and subsidiaries of Indian banks subsequent to the step taken by the banks.

Structured products are exotic derivatives products like credit-linked notes or credit derivatives. These credit link derivatives are instruments where the basic assets are loans or bonds. If the value of underlying loan or bond depreciates, the profits of the banks decline. Therefore the banks make provisions in their asset book for the loss that may arise due to depreciation of the underlying loan or bond.

Largest private lender, ICICI Bank's exposure to credit derivatives stood at $1.5 billion. On the other hand, State Bank of India, Bank of India and Bank of Baroda also had exposure to such products to the extent of $1 billion, $300 million and $150 million respectively.

Presently, all banking activities are administered by the Banking Regulation Act, 1949. The overseas operations are governed by the guidelines of host nation and RBI gets their information in the final assessment of the banks.

In its annual monetary policy review in April, 2008 RBI had stated about the cross-border supervision to regulate the operations of the foreign branches of Indian banks.