NEW DELHI: Last year, the word ‘subprime’ found its way into almost all dictionaries, this time it’s ‘exotic’, which has soured the flavour. At least this stands true for banks and corporates who tried this recipe to garnish their balance sheets.
As more companies come out and knock legal doors seeking intervention, forex derivative losses may well turn out to be the subprime crisis for India Inc.
And once again, banks have found themselves in the vortex of this financial crisis. According to a Credit Suisse report, the size of the potential market-to-market (MTM) losses of corporates are between Rs 12,000 crore and Rs 20,000 crore.
The report also states that Indian banks have taken a hit of $328 million or 1.8% of book value (BV). This doesn’t come as surprise, considering that finance minister, P Chidambaram, has himself accepted that the exposure of banks operating in India, including foreign banks, to derivatives grew 291% in two years to reach Rs 1,27,86,000 crore by end-2007.
Analysts may agree that the erratic movements in currency may have triggered this bloodbath, but there is no consensus on whether it is corporate houses that went wrong or the zealous approach by banks which made them enter into complicated derivative contracts.
Some companies such as Rajshree Sugars, Garg Acrylite, Nahar Industrial, Sabare International and Sundaram Multi Pap have already filed suits against their banks. And some leading banks such as ICICI, Kotak Mahindra and Axis are already resorting to legal means. But neither are these exceptional cases nor are all companies and banks are looking forward to the legal course.
“This is so because in some cases these companies have a far more intrinsic relationship with their banks, which goes beyond buying or selling derivative products. Why hasn’t Sundaram filed a case against SBI?,” asks a leading banker. But if analysts are to be believed, this is just the tip of iceberg.
“Not all companies have come out with their losses. It’s only the small and medium enterprises who’ve moved to courts. For them it’s a do-or-die situation. If you scratch the surface, you’ll find that all companies including those listed in BSE-30 have suffered,” says an investment banker.
Berjis Desai, managing partner, J Sagar Associates, the legal firm which is advising some of the affected corporates believes that the menace though widespread has found some bad losers who just want to join the bandwagon.
“Out of the 12-15 suits that have been filed, 3-4 don’t stand any grounds. The reality is that only those companies who can prove that there was no underlying exposure and still their banks sold these exotic derivatives product to them will eventually emerge victorious,” he says.
But banks feel that they’ve an iron-cast defence. “These options are not something new. They have been existing for a long time. In fact trading in these options had a become a popular tool for profit management. We’ve received requests, where the clients actually knew what product they wanted. They just wanted us to quote the price,” says a senior official of leading private bank.
According to the Credit Suisse report, Indian banks have a 25-30% market share among large and 60-65% among mid size corporates in complex derivatives.
