Small and medium enterprises (SMEs) in the country have lost around Rs 2,000 crore owing to their exposure to derivative products offered by financial institutions. Small exporters in the southern textile cities of Tamil Nadu said they had been hit by the “derivative scam”.
A Sakthivel, president of both the Federation of Indian Export Organisations (FIEO) and the Tirupur Exporters Association, who has taken up the matter with the Finance Minister, said that exporters had lost “substantial sums” 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. SMEs alone, he said, were estimated to have lost over Rs 2,000 crore.
He added that banks, especially foreign banks, had wrongly sold derivative products to SMEs by exploiting the latter’s ignorance.
“Banks have violated all the stipulated norms and procedures of the Reserve Bank of India,” said Sakthivel.
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, he said.
Sakthivel said the RBI had already directed banks to keep this amount in a separate account and not to treat them as NPAs. Banks are waiting for further instructions from RBI.
Banks have recently offered to absorb 50 per cent of the losses, provided exporters bear the remaining 50 per cent.
“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. This could be made valid for contracts entered into between April 2007 and June 2008,” said Sakthivel.
Many exporters had complained that banks had sold them complex derivative products; some companies even filed court cases against these banks. At that time, the rupee had appreciated rapidly against the US dollar, which also gained against the Japanese yen and the Swiss franc — the two popular currencies in which derivative contracts were conducted, says a chartered accountant.
He added that while demand is shrinking, exporters are not in a position to match the prices offered by competitors, especially China. Moreover, banks are not willing to lend to exporters, looking at their balance sheets in view of the derivative losses.
Analysts who track the textile cities of Tirupur and Karur in Tamil Nadu, where the issue has been termed a ‘derivative scam’, said that most firms there are family-run and lack proper consultants. They are reluctant to pay consultants a fee but are ready to bear losses of lakhs of rupees.
Bankers are using this circumstance to induce exporters to hedge, without explaining the concept to them. Many private sector banks have earned a bad name among exporters and this may affect their core business of lending to SMEs, feels a leading chartered accountant.
