Banks reviewing SME exposure guidelines

Written by Mahalakshmi Hariharan | Mumbai , Mar 30 | Updated: Mar 31 2008, 07:00am hrs
Banks have started reviewing their existing and possible future commercial transaction norms for small and medium enterprises although the issue of some of them misguiding a few SMEs in their exposure to derivatives products remains sub-judice.

According to market sources, the earlier cordial relationship between banks and SMEs has turned cautious. SMEs now need to answer more questions for a simple transaction. For banks, SMEs have driven credit growth. In such a confusing scenario, there may be a possibility that SMEs may knock at other sources like non-banking finance companies in order to fulfill their requirements, said a PSB official.

Earlier, SMEs had started voicing their protests as, according to them, some banks had misguided them on how to invest in structured derivatives products, leading to huge losses.

As a result of a few litigations on structured products, banks are reviewing their lending portfolios to SMEs, said a leading banking analyst.

The new-generation private sector and foreign banks have sold more of such products to SMEs. In this case, the banks may not have correctly communicated to the SMEs about the working of such complex products, or the clients have not understood the products well, said the sources.

Another source familiar with the developments said banks and companies might look at settling the matter out of court and allocate losses equally.

There are many legal points which may be in the favour of both parties. The losses can even go up to Rs 15,000-Rs 20,000 crore. Banks generally settle such cases outside the court of law, said the sources. Finance minister P Chidambaram, too, had mentioned the problem of risky products at a function on Friday, and said the currency swaps problem had come to the notice of the government. He had not elaborated further, since the matter was now sub-judice.

The guidelines of the Reserve Bank of India clearly state that banks are supposed to conduct a thorough due diligence on the risk profile of a company and also ask the company to get its board approval before experimenting in currency derivatives.

We follow an entire procedure of educating the customer. There is a process to be followed, while its not that for every product, we explain to customers before they can accept it, said a spokesperson of ICICI Bank.

Rugved Dhumale, senior manager of risk management solutions at Mecklai Financial and Commercial Services, said private and foreign banks were highly exposed to these risks.

With frequent currency fluctuations, SMEs have suffered substantial mark-to-market losses in the last 7-8 months. However, the gamut of rules and regulations in this regard is not too clear, said Dhumale.