Derivatives: Yes Bank taken to court

Bank chief says negotiating out-of-court settlement with client.

Private sector player Yes Bank today said that one of its clients had gone to court over a dispute involving a derivatives transaction.

While the bank's Managing Director and Chief Executive Officer Rana Kapoor refused to disclose the identity of the client, citing confidentiality, he said the case was filed in November 2007.

The new-generation bank was negotiating an out-of-court settlement with the client, Kapoor said during a conference call with analysts.

Yesterday, after announcing the fourth quarter results, Kapoor had said that the bank had so far not faced any delinquency on its derivatives portfolio.

During January-March 2008, it, however, set aside Rs 17 crore as provisions and contingencies, taking its overall provisions to Rs 22.8 crore for the quarter, compared to Rs 12.7 crore in the corresponding period in the previous financial year.

"The bank has made contingent credit provision of Rs 17 crore reflecting the market environment (due to rising risk) in which it is operating. This provision is not for any specific client, but for future without any actual loss incurred by the bank," Kapoor reiterated today.

The bank said its clients were meeting obligations (for derivatives) as and when the contracts fell due.

Companies like Rajshree Sugars & Chemicals, Sundaram Brakes and Linings and Sundaram Multi-pap have already taken banks like Axis Bank, Kotak Mahindra Bank and ICICI Bank to court, alleging "mis-selling" of exotic derivatives instruments causing severe loss to them.

Derivatives are financial contracts that derive their value from an underlying asset like an interest rate or foreign currency. They can be used to manage risk, reduce cost and enhance returns. Indian companies entered into these contracts to hedge their interest rate and currency risks.

Yes Bank has around 130 foreign exchange clients. Most of them are large companies and emerging corporates companies with a turnover in the range of Rs 150 crore to Rs 750 crore. Nearly 70 per cent of the bank's derivatives exposure is to large companies.

Kapoor also said that the bank planned to raise $300 million equity and debt capital to support growth. The bank already has the mandate from shareholders to issue 20 million shares. It may place these shares privately or use the qualified institutional placement route to raise equity capital of $150 million before September 2008. The remaining amount is proposed to be used by issuing debt securities and hybrid instruments.

He said that during the fourth quarter of 2007-08, nearly 300 personnel working as direct sales agents were sacked for underperformance. These individuals, who were not bank employees, were involved in the hawking of wealth management products and tapping small enterprises for business.

The bank intends to add over 200 management professionals in April-May as well as experts on foreign exchange to tap demand in cities is like Chennai and Bangalore.