Forex derivatives loss at $3 bn: Fitch

The rating outfit has been reviewing the potential counterparty credit exposure that the banking system may face due to MTM losses in derivatives transactions. Some of the losses could turn into actual losses for banks due to defaults and disputes with companies. The concentration risk is higher among larger entities, but the likelihood of default here is expected to be low.

 

The marked-to-market losses incurred by companies on exotic foreign exchange derivatives deals sold by banks are unlikely to impact the ratings of Indian banks, Fitch Ratings said.

"Indian banks would be able to absorb even large-scale defaults from the SME (small and medium enterprises) segment, as these represent only about a quarter of the total losses," the global ratings agency said in a special report on forex derivatives losses.

For the year ended March, Axis Bank had a marked-to-market loss of Rs 6.73 billion. KPIT Cummins reported a Rs 893 million loss on derivatives and Zee Entertainment suffered a Rs 115 million loss.

Many firms have also moved court against banks, alleging that exotic forex derivatives were mis-sold. The rating agency further stressed the need to review the risk management strategies of companies and banks. "Banks, in particular, need to further refine their derivatives underwriting policies, including practices for assessing potential future exposures," Fitch said. while also adopting a more conservative approach towards capital allocation," Fitch said.