RBI takes a close look at banks’ derivatives losses

UNDER SCANNER

Mumbai: Banking regulator Reserve Bank of India (RBI) is trying to figure out how much banks have lost in derivatives transactions last year. Early last week, RBI sent a letter to all banks in India to furnish details about losses incurred by each of them in 2009. 

    "RBI has asked us for losses on account of derivatives transactions crystallised during the period January 1 to December 31, 2009,'' a top banker, who did not wish to be identified, told TOI. The central banker has asked banks to furnish details on the names of the bank's clients who have lost money in derivatives transactions, nature of such transactions, amount lost through those, and the reason for such losses. RBI did not respond to TOI's request for comment. 
    The RBI letter came within days of a TOI report about a few leading banks, including some from the public sector, converting losses arising out of exposure to foreign exchange derivatives contracts into term loans for companies which had earlier entered into such contracts. In some cases, company officials from the textiles hub of Tirupur in Tamil Nadu alleged, banks had instructed these companies to convert such losses into loans. And this happened despite a clear order from RBI directing banks not to take such steps. 
    The genesis of the case goes back to 2007 and 2008 when some of the leading banks in India sold foreign exchange derivatives contracts, initially to exporters and then even to a large number of corporates without much exposure to exports directly. A few months ago, in affidavits filed in relation to a public interest litigation (PIL) in the Orissa High Court, RBI as well as the Central Bureau of Investigation (CBI) had accepted that several of those forex derivatives contracts had violated foreign currency rules, including Foreign Exchange Management Act (FEMA). 
    Recently, in some cases, banks have also gone to debt recovery tribunals (DRTs) against companies which had losses from these controversial contracts but refused to pay to the banks.