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RBI penalises 19 banks for violating instructions on derivatives
The Reserve Bank of India (RBI) has imposed a penalty ranging from `5lakh to `15lakh
each on 19 commercial banks for non-compliance with its instructions on derivatives. The
list of penalised banks includes ICICI Bank, HDFC Bank, Axis Bank, Yes Bank and State
Bank of India amongst others.
Penalties have been imposed on these banks for contravention of various instructions
issued by the RBI in respect of derivatives, such as failure to carry out due diligence in
regard to suitability of products, selling derivative products to users not having risk
management policies and not verifying the underlying/adequacy of underlying and eligible
limits under past performance route.
The RBI had issued Show Cause Notices to these banks. In response to this, banks had
submitted their written replies. On an examination of the banks’ written replies and oral
submissions, the RBI has found that violations were established and penalties were, thus,
imposed.
Many companies which had brought exotic forex derivatives from banks in 2007 and
consequently suffered losses due to the adverse movement in the underlying instruments.
Some of these companies had sued the banks for mis-selling amongst other factors.
According to news reports, most litigations have already been settled out of court with the
banks picking up 25-50% of the losses. This order is likely to hasten the settlement of the
remaining disputes. We believe this ruling by the RBI is likely to strengthen the companies’
case against banks and might lead to NPA accretion in a few cases. In our view, Yes Bank
had a bigger share of this product compared to its overall size and might be more
vulnerable to the consequent credit risks, if any, than larger private banks. However, we
await more clarity from banks on the pending litigations, if any, and the amount of
provisions already recognised in the books.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
RBI penalises 19 banks for violating instructions on derivatives
The Reserve Bank of India (RBI) has imposed a penalty ranging from `5lakh to `15lakh
each on 19 commercial banks for non-compliance with its instructions on derivatives. The
list of penalised banks includes ICICI Bank, HDFC Bank, Axis Bank, Yes Bank and State
Bank of India amongst others.
Penalties have been imposed on these banks for contravention of various instructions
issued by the RBI in respect of derivatives, such as failure to carry out due diligence in
regard to suitability of products, selling derivative products to users not having risk
management policies and not verifying the underlying/adequacy of underlying and eligible
limits under past performance route.
The RBI had issued Show Cause Notices to these banks. In response to this, banks had
submitted their written replies. On an examination of the banks’ written replies and oral
submissions, the RBI has found that violations were established and penalties were, thus,
imposed.
Many companies which had brought exotic forex derivatives from banks in 2007 and
consequently suffered losses due to the adverse movement in the underlying instruments.
Some of these companies had sued the banks for mis-selling amongst other factors.
According to news reports, most litigations have already been settled out of court with the
banks picking up 25-50% of the losses. This order is likely to hasten the settlement of the
remaining disputes. We believe this ruling by the RBI is likely to strengthen the companies’
case against banks and might lead to NPA accretion in a few cases. In our view, Yes Bank
had a bigger share of this product compared to its overall size and might be more
vulnerable to the consequent credit risks, if any, than larger private banks. However, we
await more clarity from banks on the pending litigations, if any, and the amount of
provisions already recognised in the books.
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