ACCORDING TO press reports, the commerce department has now proposed that the banks which sold the derivative instruments bear 50 per cent of the losses that accrued to exporters as a result. The proposal is being vetted by the committee of secretaries (CoS) on economic crisis. Consequently, exporters are heaving a sigh of relief and perhaps hope that the present economic crisis can be used as a crutch to minimise the losses they incurred by going in for the said complex and exotic foreign exchange derivative instruments.
Exporters have argued that they did not fully understand the exotic derivative products they had invested in and hence the banks should also assume responsibility for the losses they (the exporters) had incurred. It is against the backdrop of this argument that the commerce department has proposed that the losses incurred by the exporters be shared equally by the banks which sold the derivative products to them in the first place.
The news report further says that some exporters met the finance minister earlier and requested him to prevail on the banks to settle the issue on a no-profit, no-loss basis. They undertook to return to banks all the profit they had earned by hedging and on their part, the banks should not claim the losses they (the exporters) had incurred. (exporters’ loss is the banks’ gain) A few garment exporters from Tirupur who incurred losses by investing in the derivative products had already arrived at a settlement with banks.
The demand by the exporters and the commerce department’s recommendation that the exporters’ resultant distress be shared equally by the banks, is ridiculous, to say the least. When the USD fell sharply against the Indian rupee (INR) last year, the exporting community did not betray any ignorance of the derivative products it had invested in. But this year, the exporting community did so, because the USD started asserting itself vis-a-vis the INR. In other words, for the exporting community the exotic derivatives generated an income last year. This year the same product burnt a hole in their pocket.
Strictly speaking, banks had no right to sell such exotic and complex derivatives to exporters. The Reserve Bank of India’s (RBI’s) circulars are unambiguous on the subject. Hence banks had clearly violated the RBI circulars by selling derivative products with no underlying asset. Banks can provide such derivative products to exporters only for the purpose of hedging the risk. When the underlying asset is absent, speculation results, since there is nothing to hedge against. Thus, the exporters just traded the derivative contract rather than the underlying asset. This is prohibited by RBI. Therefore banks need to be disciplined first. Whatever loss the exporting community incurred by investing in such a product should be refunded to them by the banks which sold the product to the affected exporter in the first place.
Secondly, the exporting community complained only when the tide turned against it. As long as it made a profit it did not complain and unbelievably, it had understood the nitty-gritty of the derivative product rather well. It is only fair that the exporting community should be instructed to refund to the bank the profit it has made.
Thirdly, the banks which sold the prohibited derivative products to the exporting community should be fined exemplarily for violating the RBI circular. It is such blatant violation which gave rise to the Harshad Mehta-led scam not long ago. A single instance of violation can snowball into something undesirable for the country’s trade and industry. Therefore, there can be no justification for handling the banks with kid gloves.
The exporting community which complained when the derivatives did not suit it but conveniently kept quiet when the derivatives suited it, should be administered a severe warning. After all, even if ignorance law is assumed as excuse for once, the exporting community was not exactly ignorant. It was conveniently ignorant.
Source : Merinews.com