'Banks convert forex losses into term loans'

 Source:Partha Sinha, TNN, Mar 12, 2010, 12.20am IST

MUMBAI: A few leading banks, including some from

the public sector, have been converting losses arising 

out of exposure to foreign exchange derivatives contracts

into term loans for companies which had earlier entered into 

such contracts. In some cases, company officials from the

textiles hub of Tirupur in Tamil Nadu alleged, banks had even 

armtwisted these companies into converting such losses into 

loans despite an order from the banking regulator Reserve Bank of India (RBI).

A few months ago, in affidavits filed in relation to
a public interest litigation (PIL) in the Orissa High Court,
RBI as well as the Central Bureau of Investigation (CBI)
had accepted that several of those forex derivatives contracts
had violated foreign currency rules, including Foreign Exchange
Management Act (FEMA). In some cases, the banks have
also gone to debt recovery tribunals (DRTs) against companies
which had losses from these controversial contracts, alleged
officials of exporters which had signed such contracts.

Speaking to TOI, Raja Shanmugham, president,
Forex Derivatives Consumers' Forum said that in
Tirupur alone losses worth about Rs 132 crore have
already been converted into long-term loans.

These relates to forex derivatives contracts which were
sold to textile manufacturers in 2007 and 2008.
Interestingly, an RBI order of October 29, 2008,
signed by the then chief general manager-in-charge,
Prashant Saran, had barred banks from taking such steps.
The banking regulator had asked such losses to be kept in a separate account.

"Any amount, representing positive mark-to-market value
of the foreign exchange derivative contracts
(other than forward contract and plain vanilla swaps and
options) that were entered into during the period April 2007
to June 2008, which has already crystallised or might crystallise
in future and becomes receivable from the client, should be parked
in a separate account maintained in the name of the client/counterparty,"
the RBI had ordered.

It further added that the money, "even if overdue for a
period of 90 days or more, will not make other
funded facilities provided to the client, NPA on
account of the principle of borrower-wise asset
classification, though such receivable overdue for 90 days
or more shall itself be classified as NPA, as per the extant IRAC
(Income Recognition, Asset Classification and Provisioning) norms.
The classification of all other assets of such clients will, however,
continue to be governed by the extant IRAC norms."