NEW DELHI: The government on Tuesday said private sector banks, including ICICI Bank, HDFC Bank, Kotak Mahindra Bank, AXIS Bank, Yes Bank, were active in derivative products, including cross currency swaps and currency options. In a reply to a written question in Rajya Sabha, minister of state for finance Pawan Kumar Bansal said the RBI had reported that certain cases of alleged losses by companies on account of derivatives sold by banks had come to its notice.
Banks enter into derivative transactions with companies as a part of their business. Most of the commercial banks undertake derivative transactions. Corporates enter into derivative transactions with banks to hedge against adverse currency movements having bearing on their earnings. The RBI had issued a circular in April 2007 to provide a framework for undertaking derivative transactions. The guidelines emphasised the need for a proper risk management framework and appropriate corporate governance practices.
To protect the market-maker against the credit, reputation and litigation risks that may arise from a user's inadequate understanding of the nature and risks of the derivative transactions, the guidelines also provide that market-makers should adopt a board-approved 'Customer Appropriateness and Suitability Policy' for derivative business.
As a regulator of the foreign exchange market, RBI also issues policy guidelines to Authorised Dealers to facilitate hedging of foreign currency exposure by residents/corporates by use of derivative such as forwards, swaps and options.
Also, under the RBI Act, "derivative" is an instrument, to be settled at a future date, whose value is derived from change in interest rate, foreign exchange rate and other securities including interest rate swaps, forward rate agreements, foreign currency swaps and options. Banks have maintained that such transactions have been carried under the purview of the RBI Act.
According to a Credit Suisse report, the size of the potential market-to-market (MTM) losses for corporates is estimated at more than Rs 150 billion. The report also states that the total hit for Indian private banks is about $328 million. Further the government has also confirmed that the exposure of all banks operating in India to derivatives grew 291% in two years to reach Rs 127.86 trillion by end of 2007.
