Derivative Use by Banks in India‪.‬

ABSTRACT Derivative use by banks operating in India is hypothesized to improve their intermediary function. The research outcome identifies the influence of derivative use on the growth of advances by banks. Bank participation in advances increases with increase in hedging activities through futures. It has also been found that the Indian private sector banks have a high exposure of risk and have externalized their risk management process. Foreign banks operating in India have a low risk exposure level, but still they have moderately externalized their risk management practices. Indian public sector banks have a large deposit bas and high risk exposure but are still internalizing their risk management through ALM. The policy implication of the study is that derivative usage by banks is likely to increase the intermediary role of banks, i.e., the increase in advances growth rate rather than investment portfolio growth rate. Banks with large deposit base could gain relatively by externalizing their risk management practices since the study reveals that interest rate risk exposure of derivative users is statistically lesser than non-users / partial users.