Economy Bureau
Exporters seek full exemption from the over Rs 2,000-crore losses incurred on derivative products, even as the government is talking to banks to enable equal sharing of the losses.
In a meeting with commerce and industry minister Kamal Nath, Federation of Indian Export Organisations (FIEO) has suggested a ‘no-profit, no-loss’ model for banks to bear the losses.
According to the exporting community, the derivative products are not in sync with law and hence exporters are not liable to pay for the losses. “The derivative products as a whole were wrongly sold by banks by misusing the adverse situations and ignorance of the customers. Banks also violated all the stipulated norms and procedures of RBI’s guidelines and rules,” FIEO president A Sakhtivel said at a press conference after the meeting here.
The banks, FIEO suggested, have to be instructed to settle the losses on ‘no-profit, no-loss’ basis. As per the proposal, “The clients would be made to pay back whatever profit accrued by them through the derivative products and further the banks should not claim any loss out of it. This should be made valid for those contracts that were entered into between April 2007 and June 2008,” Sakthivel said. Contracts worth Rs 15,000 crore were entered into during the period.
The commerce ministry has already proposed that banks and exporters share the exporters’ losses from the derivative products equally.
The commerce and finance ministries are in discussions with banks in this regard, official sources said. “We are talking to the banks. Banks have two choices, either to bear part of the losses and take part hit on the books or to make exporters go bankrupt and show the loans given to them as NPAs. However, if the banks bear a part of the exporters’ losses, when the economy revives, exporters can give banks better returns,” a government official said.
However, FIEO said the derivative contracts by their very nature were “illegal” and the exporters should not be asked to meet the losses. “In the insurance business, the insurance firm indemnifies the insured against losses for a premium. But in case of these products, the case was the opposite and hence it was not in sync with the law,” FIEO director general Ajay Sahai said.
In 2007-08, when rupee was appreciating against the US dollar, exporters entered into derivative contracts to gain from exchange rate fluctuations or convert expensive rupee loans into that in other currencies like yen. But the deals backfired when the value of Indian currency plummeted 20% in 2008. As a result, many small and medium exporters suffered losses.
Following this, export firms complained to the commerce ministry that the derivative losses would wipe out their turnover and took the banks to court seeking reprieve. However, some banks have already made out-of-court settlement with the exporters. Late last year, Sundaram Multi Pap?first to move the court?withdrew the case against ICICI Bank, which was the most aggressive derivatives player.
FIEO also suggested increase in DEPB rates by 3%, removal of minimum 7% ceiling on export credit and providing 2% additional subvention, moratorium on term loans, income tax exemption on export profits, creation of export development fund to provide better marketing facilities to MSMEs and reimbursement of difference in international price and domestic minimum supply price of cotton.
FIEO demand list
• Settlement of derivative losses on no-profit, no-loss basis by banks
• Increase drawback and DEPB rate by 3%
• Removal of minimum 7% ceiling on export credit
• 2% additional interest rate subvention
• Reimbursement of difference between international and domestic cotton price
• Moratorium on term loans
• Income tax exemption on export profits
• Creation of fund to facilitate better marketing exposure to MSMEs
• Longer tenure of post-shipment credit
• Expeditious release of claims