RBI penalised 19 Banks for Contravention of Various Instructions on Derivatives

The Reserve Bank of India on 26 April 2011 fined 19 banks, including the country's top private and foreign banks for violating its guidelines on derivatives. RBI mentioned that offences of the banks for which they are penalised ranged from selling unsuitable products to corporates, selling products without verifying the underlying exposure and selling derivatives to companies that do not have risk management practices in place.

The penalties were imposed on these banks for contravention of various instructions issued by the Reserve Bank (RBI) in respect of derivatives. The lenders failed to carry out due diligence with regard to suitability of products and sold derivative products to companies not having risk management policies. They also failed to verify the adequacy of eligible limits before selling derivatives.

Banks sell derivatives to help companies to hedge risks against fluctuations in foreign exchange value and interest rates, and earn a fee. Several companies bought currency derivatives for making quick money instead of hedging their risks and suffered losses because of unforeseen fluctuation in foreign exchange value in the wake of global financial crisis in 2008. Many companies claimed that they were mis-sold these products by the banks without explaining the risks attached with such instruments and also moved the court to recover the losses. Some corporates that had entered into loss-making deals included Hexaware Technologies and Sundaram Multi-Pap.

These disputes led to an RBI intervention. The central bank in the wake of the crisis barred lenders from selling exotic derivatives. It also helped sort out some of the disputes by allowing banks to convert their receivables under derivative contracts into loans and collect them over a period of time.

While six banks have been fined Rs 15 lakh each, eight banks have been fined Rs 10 lakh each. A penalty of Rs 5 lakh each has been imposed on the remaining five banks. The list of banks include almost all the leading lenders in the private sector like ICICI Bank, HDFC Bank and Axis Bank and several foreign banks operating in India, including Citi, StanChart, HSBC and Deutsche Bank. The State Bank of India is the only public sector banks on the list of banks to be fined.

While a fine of Rs. 15 lakh each was slapped on Axis Bank, Barclays, HDFC Bank, ICICI Bank, Kotak Mahindra and Yes Bank, Rs. 10 lakh each was imposed on Citibank, BNP Paribas, SBI, Credit Agricole -CIB, Development Credit Bank, ING Vysya Bank, Royal Bank of Scotland and Standard Chartered Bank. A fine of Rs. 5 lakh each was slapped on Bank of America, DBS Bank, Deutsche Bank, HSBC and J P Morgan Chase Bank. The fine amount is modest as this is the maximum penalty that the RBI can levy under provisions of the Banking Regulation Act.

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