Is there light at the end of the tunnel?

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currency movements or mark-to-market losses or gains on their positions on a daily basis. Many of them went by what the banks were telling them when the latter were selling exotic products to them. “Though the ultimate responsibility of taking up the product rests on the company, one cannot deny the role of the banks in pushing them on to the latter,” says K Rajaram, head of forex, treasury and risk management at Arvind Mills.

To add to the misery, companies were asked by the Institute of Chartered Accountants of India (ICAI) in March this year to account for derivative transactions in their financial statements. This has been described as a forerunner to the new AS-30 norms to be introduced in 2011 by the body. Among other things, the AS-30 norms speak of providing for all losses by a company in its books of account.

By some estimates the overall mark-to-market losses suffered by companies due to forex derivative positions held by them varies from anywhere between $1.5 billion to about $5 billion. But the figure of $1.5 billion is closer home, say a few experts. “I think $4-5 billion is a bit exaggerated,” says a company executive. Nandlal Bhatkar, chief executive officer of the Pune-based Pyxis Systems, which provides software, training and consulting on derivative issues to banks, reiterates this point.

“There are some 8-10 banks who are into forex derivatives in the country. I don’t think the mark-to-market losses would be over $1.5 billion.”

Though a mark-to-market loss is a notional loss, the big issue for banks is when companies don’t pay up for positions held by them. That is a credit loss, which is serious from a bank’s point of view. Already a few companies such as Rajshree Sugars & Chemicals and Sundaram Brake Linings in the south have said that they will not pay up on certain transactions, which they claim were missold to them by their banks. They have dragged their banks to court on that matter. “There are more companies waiting in the wings to do the same. I think they are trying to determine whether litigation is the best option given the spate of suits that have been filed at the moment. They would be waiting for the outcome,” says a banker based in Mumbai.