Don't want complex derivatives, but enforce existing rules: SMEs

The regulator is planning to restrain banks from selling complex derivatives to small and unlisted companies. But, they are hardly impressed as existing rules to regulate the forex derivative markets have not been enforced by the banking regulator.

For instance, the Reserve Bank of India (RBI) had issued a circular in October 2007, whereby only the regular banker with whom the small & medium enterprise (SME) is having prior credit relationship is allowed to sell derivative contracts to a SME.

This stipulation is a preventive measure whereby only the regular banker of an SME, who is already aware of the risk appetite and underlying exposure of the client, is authorised to sell derivative to it.

 

This rule, say small exporters, was grossly violated by several banks in the last crisis. Many banks entered into contracts with SMEs who do not have any other relationship with the bank except derivative deals, which grossly violates of the above guideline.

‘‘Putting in place regulation is one thing – following it in letter and spirit is another,’’ said an exporter in Tirupur. For instance, there’s another rule which says banks must do strict due diligence of the SMEs books before entering into derivative deals. This too was not followed in the 2007 derivative crisis which triggered a lot of litigation.

‘There is no shortage of guidelines and procedures – there is already enough well intended guidelines which, if properly followed, would prevent such a scenario in future. What is required at this point is to put in place proper monitoring mechanism whereby RBI will closely watch whether its stipulations are being followed by the banks in letter and spirit, ’’ said another exporter, who didn’t wish to be identified.

Exporters allege there’s no attempt being made by the RBI to improve the monitoring mechanism that will throw warning signals before such a big damage is done: the last crisis saw banks and companies piling up MTM losses of Rs 31,719 crore.

Raja Shanmugam, another exporter from Tirupur, says a ban on exotic products won’t hurt SMEs as what they need is plain vanila options and forward contracts, which are good enough to help them hedge and manage their currency risks.