Sunday, June 24, 2012

Volume of Bank Fraud is Enormous

RBI Mute On The Biggest Bank Scam
The apex bank hushes up the FEMA violations that took place during the sale of forex derivatives by banks, leading to a loss of Rs 25 lakh crore. Bibhuti Pati, in a follow up to one of the biggest bank frauds, reveals the haplessness of the victims

DERIVATIVES are products invented by the West to fleece the rest of the world. More rightly pointed out by Warren Buffett, these are nothing but financial instruments of mass destruction. More than 90 per cent of these products originate from the five big Wall Street banks. Greece is a standing example of how even a country can go bankrupt by signing a derivative agreement with a Wall Street bank, in this case, Goldman Sachs.
Also, as pointed out by Randall Dodd of the International Monetary Fund, during the financial crisis of 2007-08, these derivative products came in handy for US to transmit the crisis to several emerging market economies resulting in loss of a whopping $550 billion to developing countries including India.
Forex Derivative Consumers’ Forum (FDCF) president Raja M Shanmugam said, “It was during the first half of 2007 when there was a steep appreciation of the rupee against the US dollar whereby rupee fell to 39 per dollar from 46 per dollar within a short span of time. During that time, several banks approached the exporters claiming that they had sophisticated derivative products that would save the exporter by making profits which would offset the loss suffered on account of rupee appreciation. The promise made by the banks was that they would look after the fluctuation part of the deal and take care of it so that there are no losses in transactions.”
However, by the end of FY2007-08, several exporters across the country started facing huge mark-to-market losses when the bankers started quoting the global financial crisis as the reason behind the fallout. During that time, several Indian exporters, who suffered losses on account of this exotic forex derivative, joined hands and started a movement called FDCF whose principal objective is to save the exporters who suffered exorbitant losses due to these exotic currency derivatives.
“Initially we approached the executive establishment of the Government of India by meeting the higher ups in the RBI and the finance ministry including the then finance minister. But the response we got was that this is just a bilateral contractual issue between two parties thereby washing their hands off the issue,” said Raja.
“Only due to the intervention of the Orissa High Court did all these issues come to limelight, whereby the country came to know that the loss projected by the RBI on a particular date was around Rs 31,700 crore,” added Raja.
P Moghan, a garment exporter, said, “As exporters, we generally use Plain Vanilla Forward Contracts to hedge our currency risk due to export business. But in 2007, we were approached by several banks stating that it is time we switched over to more sophisticated hedge instruments such as exotic derivative products to effectively deal with currency risk.”
“The banks came to our doorsteps stating that there was no need for any collateral securities or NOCs – just a signature in the ISDA master agreement would suffice and they would take care of the rest. Also, they promised that they had a well equipped treasury department that would take care of the fluctuation part of the contract so that there will be no loss to our account.”
“As an exporter making garments for the European Union, we have little exposure to these complex products. We entered into these contracts purely on the advice of the banks that sold them. But we were shocked to find that the banks absolved themselves from any responsibility when losses in crores of rupees started to accumulate. They changed their stance, saying, ‘you have signed the contract, so you have to bear the losses’.”

“The unique feature about all these exotic contracts is that when profits arise, they would be only in small amounts say $10,000, but when losses surface, they would run into crores of rupees. In many cases, the maximum to actual profit ratio works out in the range of 1:50 or 1:100. No prudent exporter would go for such highly skewed contracts if properly advised by the banks. But subsequently, we realised that we were taken for a ride by these banks, who thoroughly misled the risk profile of these contracts purely with an eye on the margins they can make out of these contracts,” said Moghan.

S Dhananjayan, adviser of FDCF, said, “In my opinion, the forex derivative scam is the biggest banking scam in the history of independent India – much bigger than scale and implications than the Harshad Mehta scam.”
“It is highly disheartening that the government has shirked the responsibility on the pretext that these are private contractual disputes without analysing the systemic impact of this scam. We have appealed to the finance ministry to establish an enquiry committee with a view to find out the root cause of such a catastrophe, but no action has been taken yet.”

The RBI earlier stated that exporters were equally at fault as the bankers. However, when pinned down by the Orissa High Court, they came out with facts that ‘Serious irregularities/ FEMA violations have taken place in the sale of forex derivatives by banks’. Also in April, 2011, they also attempted to hush up the issue by levying paltry penalty on the erring banks.

 During the first half of 2007, there was a steep appreciation of the rupee against the US dollar, several banks approached exporters claiming they had sophisticated derivative products that would save the exporters from the loss suffered on account of rupee appreciation
 However, by the end of FY2007-08, several exporters across the country started making huge mark to market losses and banks washed their hands off the issue
 The RBI earlier stated that exporters were equally at fault with the bankers
 The apex bank also attempted to hush up the issue by levying a paltry penalty on the erring banks
 Now, each arm of the banking establishment of the country is ganging up before the Supreme Court – to stall the CBI probe as ordered by the Orissa High Court
 Exporters call it an international conspiracy to fleece out the emerging market economies in which Indian banks might have played cat’s paw
Now, each and every arm of the banking establishment of the country is ganging up before the Supreme Court – to stall the CBI probe as ordered by the Orissa High Court. The Special Leave Petition before the Supreme Court was originally filed by the Fixed Income Money Market and Derivatives Association, but subsequently all other limbs of the banking establishment, namely, Foreign Exchange Dealers Association of India (FEDA), Indian Bankers Association (IBA) and RBI, joined the battle with a view to scuttle the attempt of the CBI to carry out a thorough investigation.

It seems fishy why so many public institutions are going to the extent of engaging all big legal luminaries of the country and spending enormous amount of public money in an attempt to stall an unbiased investigation by the apex investigation agency of the country. If there is nothing to hide, then there should be no attempt to stall a probe on the issue – what is now being done is an attempt to jeopardise the process of the law in an attempt to scuttle the investigative process that would reveal the truth as to who is responsible for this mess.

“We also feel that there is much more to this iceberg. There is talk of an international conspiracy to fleece the emerging market economies in which our banks might have played cat’s paw. There is also a possibility that bank officials might have pocketed enormous profits leaving the banks to bear the loss on account of counter-party defaults thereby causing loss of public money,” said Dhananjayan.

“All that we want is natural justice for every citizen of this country and not just to those mighty institutions with unlimited access to public money. There must be a thorough probe by an independent investigative agency,” he demanded.
Questions the apex bank ought to answer

1. AS PER figures submitted by the RBI before the Orissa High Court, the notional principal outstanding in respect of derivative contracts as on December 31, 2008, is $2,435 billion.
Since the country’s annual aggregate of exports and imports has not exceeded $500 billion, the derivative outstanding figure of $2,435 billion, which is almost five times of the country’s aggregate exim turnover, signifies that there is rampant fraud through currency derivatives taking place right under the nose of the apex bank.
2. THE OCTOBER 13, 2008 circular of RBI specifies that derivative losses should be taken into account for borrowerwise NPA classification norms, whereas the October 29, 2008 circular specifies that derivative losses should be taken in a separate account and not to be considered for borrower-wise NPA classification. Why this sudden reversal of policy? Was it in acknowledgement of the wrongs committee in the mis-sale of derivative products by banks?
3. THE RBI penalised 19 banks on April 26, 2011 for violating the guidelines regarding sale of derivative products to customers. Why did the RBI refuse to give the details and documents relating to levy of penalty when requested under the RTI? Is it trying to shield the erring banks?
4. THE APEX bank washed its hands from the issue by penalising the banks that indulged in violations in derivative trade. It is in no way a relief to exporters who suffered enormous losses. What are the measures taken by the RBI to strengthen its monitoring mechanism in order to get early warning signs of such violations so that preventive measures could be taken before such a catastrophic damage is done to the industry?
5. WHY DID the RBI join hands with FIMMDA, IBA and others in the case before the Supreme Court in order to scuttle a thorough CBI probe on the entire derivative fiasco? Is the bank an independent regulator or just an extended arm of these erring banks?

1 comment:

majji js murthy said...

I have reasons to believe that some of the top executives and CMDs of the Public Sector banks are party to this scam on derivatives. CBI should make a thorough inquiry into this scam. There is one CMD of a top Public Sector Bank who made 54 foreign trips during 2008-09 when the bank had only one full fledged overseas branch. Similarly many of his cronies in the bank also made many foreign trips for the unknown reasons. How RBI or Finance Ministry remained silent when they made so many foreign trips without any logic? Even when a Central Cabinet Minister makes foreign trips, there are so many restrictions on their overseas jaunts, how they had permitted so many foreign trips to one CMD in a financial year? Similarly there could be such forein trips by other public sector banks also. Let CBI look into all these aspects since the Derivatives scam occured / planned during that period only.