The Reserve Bank of India has imposed penalties ranging from Rs 5 lakh to Rs 15 lakh on 19 commercial banks including 18 private sector/ foreign banks and State Bank of India for mis-selling currency derivative products to Indian companies and exporters. The penalties have been imposed on these banks for contravention of various instructions issued by the Reserve Bank in respect of derivatives,such as failure to carry out due diligence in regard to suitability of products,selling derivative products to users not having risk management policies and not verifying the underlying/ adequacy of underlying and eligible limits under past performance route, the RBI said on Tuesday. The RBI had issued show-cause notices to these banks. In response,the banks submitted their written replies. On a careful examination of the banks written replies and the oral submissions made during the personal hearings,the Reserve Bank found that the violations were established and the penalties were thus imposed, the RBI said. The banks penalised by the RBI are: Axis Bank (Rs 15 lakh),Barclays Bank PLC (Rs 15 lakh),HDFC Bank (Rs 15 lakh),ICICI Bank (Rs 15 lakh),Kotak Mahindra Bank Limited (Rs 15 lakh),Yes Bank (Rs 15 lakh),BNP Paribas (Rs 10 lakh),Citi Bank NA (Rs 10 lakh),Credit Agricole - CIB (Rs 10 lakh),Development Credit Bank (Rs 10 lakh),ING Vysya Bank (Rs 10 lakh),Royal Bank of Scotland (Rs 10 lakh),Standard Chartered Bank (Rs 10 lakh),State Bank of India (Rs 10 lakh),Bank of America NA (Rs 5 lakh),DBS Bank (Rs 5 lakh),Deutsche Bank AG (Rs 5 lakh), Hongkong and Shanghai Banking Corporation (Rs 5 lakh) and JP Morgan Chase Bank NA (Rs 5 lakh). During the 2006-08 period,banks had been enthusiastically selling exotic forex derivative products to corporates which apparently bought them in speculation of making good money as they had in the past. However,the turmoil in the global credit/derivative market following the surfacing of the subprime crisis in the US upset the plans of Indian companies. A steep decline in the value of the US dollar against the yen and the franc hit Indian corporates which have used these two currencies extensively to swap their rupee denominated debt. While many firms had gone to the court against banks,others were in talks with their banks for restructuring their currency deals. Many small and medium companies suffered extensively in the selling of exotic derivative products and this mis-selling cost Rs 350 crore losses in the Tirupur textile industry alone. These exotic derivative products are OTC products traded privately and not on any exchange and are therefore by definition not very transparent in nature. Most of the forex derivative OTC market is controlled by a handful of foreign banks, said a forex dealer. Corporates bought these derivatives in a bid to improve the earnings on their exports,lower the outgo on imports or cut the interest and repayment cost on loans. Banks stopped selling such exotic products since 2008.
