First, such a product places the entire risk of the exposure on the banking system and is akin to a bond issued by a bank itself. Second it distorts the pricing of corporate bonds. Third, such a practice also discourages institutional and retail investors to appraise and assume credit risk. Any credit enhancement or protection needs to be offered and priced separately.
A policy framework for introduction of credit derivatives is being developed taking into account the lessons learnt from the global crisis. There is also a view that corporate bond markets will only develop if RBI allows repos in such bonds.