With a credit derivative, a bank can transfer the risk and returns associated with a loan, even though from an accounting perspective the loan remains on the books of the bank. By using credit derivatives, banks can create “synthetic securitizations” to transfer risk and reduce risk-based capital requirements, while avoiding disclosure of an effective loan sale and possibly harming a customer relationship.
Enterprises producing goods and services, exporters, importers or any other economic agent that has got to manage its finance necessarily requires expertise in treasury management. In 1999, I was surprised to learn that an exporter with a turnover of over Rs2 billion did not have any expertise at all in managing its own finance.