Govt may ask banks to share derivative losses

Commerce ministry sends its finance counterpart note on 50:50 split with exporters.

The commerce ministry has written to its finance counterpart suggesting that domestic banks should share 50 per cent of losses arising out of derivative contracts that exporters have taken to protect against currency fluctuations.

With the Indian currency depreciating more than 20 per cent in calendar year 2008, exporters have complained to the commerce ministry that losses from derivative contracts could wipe out their turnover in some cases.

Last year, many exporters complained that banks had mis-sold them complex derivative products, and some firms even filed court cases against the banks. At that time, rupee had appreciated rapidly against the US dollar, which also gained against Japanese Yen and Swiss Franc — the two popular currencies in which these derivative contracts were conducted.

“The commerce ministry has proposed that the losses should be shared equally by banks and the exporters,” said a government official in the know. The finance ministry has not yet responded. If the proposal is accepted, the Reserve Bank of India will also need to be involved.

Exporters have been hit by derivative losses at a time when overseas demand is shrinking. Exports fell 12 per cent for the first time in seven years in October this year and are expected to fall by almost the same amount in November.

According to commerce ministry sources, if banks do not go soft on dues from exporters on account of the derivatives and forward contracts, thousands of small companies engaged in exports could close.

“The idea is to let those companies continue to operate in this adverse economic scenario. If losses are not shared, the companies will close and banks would have to resort to ways like one-time settlement,” the official said.

The commerce ministry’s proposal follows reports from exporters that they are incurring heavy losses because of the instruments. “Some of these small companies that have approached the ministry may have to pay Rs 40 lakh, which is more than the profits that they earn,” the official said.

Last fiscal, the Indian rupee appreciated close to Rs 39 to a dollar in the last fiscal as investors — both equity and portfolio — invested larger amounts in India, then among the fastest-growing emerging markets.

Several exporters, many of them small and medium textile firms, had invested in derivatives betting on the rupee appreciating further in 2008. But in calendar 2008, portfolio investors took out more than $14 billion from the Indian equity markets as the global financial crisis escalated, causing the rupee to depreciate sharply, crossing Rs 50 to the dollar at one point.

“Most exporters, including me, had subscribed to derivatives when the rupee was appreciating,” said Ganesh Kumar Gupta, president of Federation of Indian Export Organisations (FIEO). Gupta, who heads the Varanasi-based Vijay Silk House, is likely to suffer a loss of about Rs 3 crore on forward contracts.

According to Gupta, losses arising out of derivative products in 2007-08 by Indian export firms could be close to Rs 24,800 crore. “Losses on account of forward contracts is yet to be ascertained, but could be close to Rs 5,000 crore,” he said.