Thursday, April 26, 2012

Banks caused Loss of Rs.30000 crore

British Bankers Association bows out of role as Libor's chief arbiter

LONDON: Libor, or what was called the London Interbank Offer Rate, has long been a cornerstone of global finance. It is the basic benchmark interest ratefor everything from personal loans to home mortgages to complex derivative and forex transactions that run into trillions, even in India.

On Wednesday, the British Bankers Association, the body that since 1986 has been in charge of setting Libor, officially bowed out of its role as the chief arbiter of a global rate — marking the beginning of the end ofLibor as we knew it. The British Bankers Association(BBS) was a step ahead of being stripped of its role by regulators, after a major Libor reform movement began a month ago.

On Friday, Martin Wheatley, managing director of FSA, the UK's equivalent of Sebi, who was given charge of coming up with a reformed Libor, is expected to announce that from now on, Libor will be set according to actual market trades instead of banker's estimates, and managed by regulators and not trade bodies like the BBS.

The UK regulator has been under extreme pressure, both domestically and internationally, after the spate of scandals about banks rigging Libor throughout the noughties — a development that cost Bob Diamond, high profile head of Barclays, his head. Barclays was fined a record £290 million for rigging Libor.
Over 12 major banks are under international scrutiny for systematically rigging their estimates of Libor rates to help their own traders.

US regulators have been most strident in their calls for reform, and were the first to crack down on Barclays. American regulators have been calling for Libor to be immediately reformed, or abolished, and pursuing Libor-rigging with evangelical zeal.

Libor is currently set by a survey of individual banks on a daily basis, where they are asked at what price they expect to borrow across some 10 currencies. Banks submit their estimates (not actual borrowing rates) to the BBA, which then uses an averaging formula to set Libor. This is then used globally as the base rate for contracts. The system depended on a "gentleman's agreement" that respondents would not cheat. But banks have been accused of routinely manipulating their estimates — either setting it too low, or too high — to accommodate their own interests. Euribor, the European interbank rate is also under scrutiny, but is unlikely to face severe reforms as its members are national banking associations of member countries, and not individual banks.

Under the new rules, it is expected that actual market trades in the daily interbank market — the rate at which banks can borrow and lend from each other in the overnight market, and therefore used as a benchmark floor borrowing rate across the world — will provide the data, and it will be overseen by a formal regulator. The UK parliament is working on legislation that will allow the changes. Once changes are put in place, market participants expect to take some time to see how the new numbers pan out, and adjust to them gradually.

The spate of scandals has not only cost a host of banks large chunks in fines, it has also irreparably tarnished the sanctity of Libor as a globally accepted benchmark. The FSA's moves to reform Libor was driven by the need to restore international confidence in what is a London landmark

DNA investigation: Banks used exotic means to hoodwink Reserve Bank

Published: Thursday, Apr 26, 2012, 8:30 IST
By Gangadhar S Patil | Place: Mumbai | Agency: DNA

Banks adopted various ways to sell illegal and ‘exotic’ derivatives in their profit pursuit, bypassing the Reserve Bank of India’s (RBI) guidelines and causing losses of as much as Rs34,000 crore, which they then tried to cover up by forging documents, DNA investigations have found.
Banks sold these contracts to gullible companies, taking advantage of a depreciating dollar against the rupee, and offering exporters what they needed — an alternative to offset their currency losses.
In 2007, the rupee rose rapidly to Rs39 from around Rs50 per dollar, causing panic among Indian exporters who feared loss of revenue - they were getting less rupees for their dollars. And as the dollar continued to fall, banks started wooing clients via e-mails, even sending company executives on free holiday trips to Singapore, Thailand and South Africa to convince them to buy these derivatives.
DNA has access to several such e-mails and documents which show how banks brazenly violated RBI guidelines.
In 2006 and 2007, under the pretext of a conference, ABN Amro took executives on a free five-day tour of Thailand and Malaysia. “The conference was attended by about 100 such representatives of several companies from India where they were explained about derivative (exotic) products,” as per an affidavit by I Venkateswarlu, executive with Tiruppur-based Armstrong Knitting Mill. DNA has reviewed the affidavit.
Subsequently, he bought these derivatives in 2007, which led to a loss of Rs27 crore.
S Dhananjayan, a chartered accountant from Tiruppur, said two of India’s biggest banks took their clients on a fully-paid trip to Cape Town, South Africa, Singapore and other places.
Some banks even put up hoardings in Tiruppur emblazoned: “Suffering from forex losses? Come to us, we have a solution”, while others preferred to draw customers by sending personalised e-mails and attractive presentations.
Banks’ particular interest in Tiruppur companies can be attributed to the fact that Tiruppur is a leading source of hosiery, knitted garments, casual wear and sportswear exports for India, and therefore, a major source of foreign exchange for the country. The city accounts for 80% of India’s cotton knitwear export, worth an estimated US$2 bn. Besides Tiruppur, exporters in Mumbai, Hyderabad, Ahmedabad and a few other cities were also targeted by the banks to sell exotic derivatives.
Early 2007, Rajith Kumar Naidu of State Bank of India, Chennai, sent an e-mail to a Tiruppur-based exporter saying, “Please find attached some very interesting structures with potential to earn huge profits... Please call me for further clarification.” In the next e-mail, Naidu claimed that these derivatives have “strong possibility of making profits”.
Further, banks used a template of contracts to avoid procedural delays and finalise the deals quickly. For instance, ICICI Bank signed a contract which was meant for a company with a Tiruppur-based partnership firm to quickly set the process rolling. In many cases, even the important sections of the contract agreement were left blank. DNA accessed many copies of such contracts.
The other strategy that banks followed was holding exclusive seminars on how derivatives are an easy option of making profits and offsetting losses due to fluctuating forex rate, said Dhananjayan.
The RBI guidelines said banks should carry out due diligence to ensure that each derivative transaction is suitable and appropriate to a customer’s requirements.
However, none of these banks followed it in principle, and encouraged corporates to sign deals that were purely speculative in nature and, without a doubt, inappropriate for the business.
In this regard, the RBI had written a letter to CBI on October 27, 2009, listing 10 rules, under the Foreign Exchange Management Act and RBI, which these banks flouted while selling derivatives during 2007-08.
Since the deals were formed without underlying assets, as soon as the issue was highlighted in media, banks made traders sign some underlying papers to cover up the fraud.
For example, one R Senthilvel of ABN Amro, sent an e-mail on November 7, 2008, to Cylwin Knit Fashions of Tiruppur, saying “Take printouts of the attached (an order sheet document of an unknown trader) and affix a seal of Cylwin and sign and give to us.”
However, the order sheets were not pertaining to Cylwin at all.
If that were not enough, banks forced and intimidated exporters to sign documents at the end of the financial year 2009 in a rush to convert derivative losses into corporate loans.
“In fact, in one exporter’s case, the documents converting the loss into a loan were signed at midnight on March 31, 2009,” said Raja Shanmugam, president of Forex Derivative Consumer Forum.
In 2009, the central bank directed all the banks to maintain a separate account for losses due to exotic derivatives, yet many banks didn’t.
DNA is in possession of many letters exchanged between SBI and exporters, where exporters appealed to Tiruppur branch of SBI to implement the RBI direction, but the largest public sector bank did not.
The matter has been pending with the Supreme Court for more than two years now.

Who is responsible for Rs 32,000 crore Loss in Currency Derivatives to corporate by Indian banking sector ?  Are Penalty of Rs 5 to 15 lacs (That Too To Be Paid from Shareholders Funds) is Sufficient for Such Big Lapses by Board of Directors, CMDs and  EDs of Private / Public Sector Banks - RBI Needs to Introspect.
Rajesh Goyal, Executive Consultant

During the last few months the issue 32,000 crores scam in the banking sector has been kept under wraps and RBI and banks have been consistently been trying their best to keep this issue under carpet.  Inspite of CBI enquiry into the whole affair and court strictures, the issue has NOT been sufficiently highlighted by major financial newspapers owing to the reasons best known to them. 

It has been reported that CBI in its affidavit in the Orissa High Court had mentioned: “The Reserve Bank of India (RBI) has been monitoring the gross end-to-end mark to market losses incurred by the banks. As on December 2008, the gross mark to market gains (corresponding losses to consumers) of 22 banks working in the business of derivative work is Rs 31,719 crore.”

Some believe that this is only a very very conservative estimate and tip of the real scam, as it is believed that the total derivatives contract sold in India as per RBI approvals is 3 trillion USD on December 2008 (as per the statement of P Chidambaram in Rajya Sabha), where as total GDP of India was not more than 1 trillion USD and total export and imports including oil bills were not more than 500 billion USD.   The difference in the value of the dollar however has been between Rs 8.50 to Rs 10 / dollar. If this difference is multiplied by the figure of 3 trillion, we are looking at a figure of Rs 25 lakh crore that has not been accounted for.   If this turns out to be true, then the scam will be even bigger than 2G scam. 

However, RBI and Banks were forced to share at least some information when the affected corporate / importers / exporters filed cases in various Courts of the country and refused to pay the losses and asked their respective banks to pay the same as they have mis-sold such products to them for their personal petty gains and profits for the bank.  Corporate have been given various concessions / waivers so that they do not default on the loans they have availed from the banking sector.

RBI, the only regulator of our Banking system,  had miserably failed to take timely steps so as stop the Banks openly flouting these rules.   In a reply to RTI query,  RBI appears to have taken a stand that it does not vet all the forex derivatives products sold by banks in the country.   However, under pressure from all sides, RBI in April 2011  fined 19 commercial banks, including the country’s largest, State Bank of India, for mis-selling derivatives products to clients  RBI has imposed a small fine of Rs 5-15 lakh on these banks for not complying with its instructions on derivative products.  Who had to pay this fine? Poor shareholders of these banks  had to pay these fines as orders were not to recover the same from salaries of CMDs / EDs etc.  Is a penalty of few lacs on a Bank is sufficient when losses to the economy are in thousands of crores of rupees?  Has any other action like suspension or dismissal of any Head of the Bank or other officials has taken place?  Why RBI had not forced some Heads to roll down for such a big scam.  In 2G scam, even ministers have been jailed when the matter was taken up seriously by honourable SC

RBI and concerned Banks had been consistently seeking shelter of secrecy and  were not ready to disclose any further details.   RBI had been taking the plea that DISCLOSURE OF THIS INFORMATION WOULD AFFECT THE ECONOMIC INTERESTS OF THE STATE  AS SUCH DISCLOSURE TO THE PUBLIC COULD BE DETRIMENTAL TO THE INTEREST OF THE SUBJECT BANK AND TO THE BANKING SYSTEM IN GENERAL.

However, now CIC in one of the judgments has asked RBI to provide detailed BANK WISE AND CUSTOMER WISE  losses in the currency derivatives  to Mr. Raja M Shanmugham who had been fighting to get this information from RBI for now over one year.  (The full judgment is available on this website itself).   Let us see whether these orders are complied with or RBI and banks seek shelter under some other rules.

Now question arises who are the people in banking sector who allowed this kind of scam to continue for months together.  Who colluded with whom ?   From my  experience, I can say  that even CMDs and EDs, GMs, dealers  of such banks had little or no knowledge about the risks such derivative deals carried and were swayed by personal gains they were likely to get in different shapes.  Can junior FEX traders do such large transactions without the knowledge of GMs / EDs / CMDs / Board ?  Were  the top management of these banks were so INCOMPETENT AND UNEDUCATED  that they could not make efforts to understand the basics of derivatives?   With best of brains in India, why we have such incompetent people heading our top Banks ?  Instead of being a guide to the juniors, they bashed people who tried to stop such inappropriate transactions.   A review of the people who actually perpetuated these losses will show that by this time they have been promoted and enjoying all the benefits, and none of them has been punished till date.    Some of them must have retired after enjoying their full terms of service, 

RBI and Banks  now needs to introspect and strengthen their systems and punish the guilty.  How it is possible that 22 banks together flouted rules and RBI could not detect this scam even in one of these banks ?  The continued pressure from various sides may soon bring to light new dimensions of this scam and the names of the Banks and people responsible may have to disclosed soon. 

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