The Reserve Bank of India (RBI) has pointed out serious lapses in the way banks sold derivative products in 2007 and 2008. This is part of RBI’s reply to a questionnaire sent by the Central Bureau of Investigation (CBI). The Orissa High Court had last year asked the CBI and the Enforcement Directorate to submit a report on the derivative losses incurred by the industry last year.
The high court order came in response to a writ petition filed by an individual who alleged that banks sold the products on forecast that the rupee would strengthen against the dollar. The CBI and the ED submitted their reports earlier this month. The case is scheduled for hearing on November 17.
Among violations pointed out by RBI are deviations from the Foreign Exhange Management Act (FEMA) notifications and guidelines. Banks, it said, offered structures in violation of “extant” regulations that resulted in increase in risk and receipt of premium. Besides, they did not verify the underlying exposure, it said.
The report said banks also failed to carry out proper due diligence of the suitability of the product offered. Besides, they did not get written acknowledgements from clients that they had understood the risks disclosed, it said.
Also, the booking of contracts between banks and customers took place on the basis of past performances and beyond 50 per cent of the eligible limit without certificates from chartered accountants, it said.
“Even when transactions were based on underlying exposure, banks relied on photocopies of documents…This led to misuse by clients who used photocopies of the same underlying to enter into different contracts with different banks, which resulted in manifold increase in their losses,” said the summary of the report submitted by the CBI.
Though RBI maintained that “losses suffered by customers may not represent gains by banks” and that the issues were not “systemic”, it said an inquiry by an inter-departmental group had “identified violations which are serious in nature and they are being examined for further action.”
RBI had constituted the group following discussions with chief executives of 22 banks. The group reviewed the derivative transactions of banks during 2007 and 2008 and recommended supervisory action. Many exporters had entered into structured cross-country derivative contracts to hedge their exposure to exchange rate risks.
The CBI said the apprehension of the petitioner that officials of RBI, banks and government were in conspiracy with an unknown foreign entity was not based on “logical conclusion”.
The CBI said the contracts entered into by various banks might be looked into by RBI and the ED on a bank-to-bank basis. If this revealed commission of any offence under the Indian Penal Code and the Prevention of Corruption Act, the CBI might look into the case, it said.
