Fieo questions banks derivatives exposure, says loss at Rs 2,000 cr

Written by Neha Pal | Updated: Aug 26 2009, 04:27am hrs
Even though the finance ministry has confirmed that the total mark-to-market (MTM) derivatives exposure of banks to the SMEs was only Rs 196 crore, the Federation of Indian Export Organisation (Fieo) said the derivative issue involves a loss of Rs 2,000 crore.

However, finance minister Pranab Mukherjee told Parliament, Very few banks have derivative exposure to small and medium enterprises (SMEs) and as on December 31, 2008, the total MTM exposure of the banks to SMEs was only Rs 196 crore which accounts for less than 1% of their total MTM exposure in derivatives. When asked Fieo president A Sakthivel said, The loss has been of Rs 2,000 crore but many banks have converted these losses into corporate loans rather than showing them as derivative losses which is why the government has not been able to calculate the overall loss.

Fieo has in turn demanded that banks should be instructed to resolve the issue on a no-profit, no-loss basis, whereby clients would be made to pay back whatever profit had accrued to them through this derivative product, while banks should not claim any loss out of it.

Banks must be instructed to resolve the issue on a no-profit, no-loss basis, whereby clients would be made to pay back whatever profit had accrued to them through this derivative product, while banks should not claim any loss out of it, Sakthivel said.

The finance minister had said that RBI had collected data from 22 banks on their derivatives portfolio and their exposure to SMEs and found out that there were very few disputes with SME customers on account of derivative transactions. However, Sakthivel added that many exporters had complained that banks had sold them complex derivative products due to which some companies had even filed court cases against these banks.

The Fieo president said that the Indian exporters have lost hugely through derivative products offered by financial institutions at a time when they had hedged their risks in the wake of the appreciation of the rupee. The exporters were not informed about the full implications of derivatives and most had entered into contracts in good faith. Their losses had forced some SMEs to close down, while a few others were on the verge of closure.