Tuesday, April 26, 2011

RBI cracks whip on 19 banks

The Reserve Bank of India today slapped penalties worth Rs 1.95 crore on 19 commercial banks, including the State Bank of India, HDFC Bank, ICICI Bank and Citibank, for failing to comply with its instructions on selling derivative products.

The banking regulator said the penalties were imposed for failure to carry out due diligence with regard to suitability of the products that the banks had offered to their customers.

It did not give any details about the derivative instruments that the banks had sold.

The banks were also pulled up for selling derivative products to users who did not have risk management policies.

Others were pulled up for failing to verify the adequacy of the underlying asset and eligible limits under the past performance route.

A derivative is a contract whose payoff depends on the behaviour of some benchmark, which is known as the “underlying”.

The underlying is typically a tradable asset, for example, a stock or commodity. The most common derivatives are futures, options, and swaps. The most common derivatives have a market value and are traded on exchanges.

The highest penalty of Rs 15 lakh each was imposed on six banks — Axis Bank, Barclays Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank Ltd and Yes Bank.

Eight other banks were slapped with penalties of Rs 10 lakh each. These were BNP Paribas, Citibank NA, Credit Agriocole CIB, Development Credit Bank Ltd, ING Vysya Bank, the Royal Bank of Scotland, Standard Chartered Bank and the State Bank of India.

Four others — DBS Bank, Deutsche Bank AG, Hongkong and Shanghai Banking Corporation Ltd and JP Morgan Chase Bank NA — were asked to pay a penalty of Rs 5 lakh each.

The RBI said in a press release issued today it had sent out showcause notices to these banks earlier. After examining the banks’ replies to the notices and hearing oral submissions from officials, the regulator found that the violations were established and the penalties were, therefore, imposed.

The RBI is empowered to regulate interest rate derivatives, foreign currency derivatives and credit derivatives.

Under interest rate derivatives, the RBI allows three types of derivatives — interest rate swap, forward rate agreement and interest rate futures.

Under foreign currency derivatives, it permits foreign currency forward, currency swap and currency options.

The RBI has laid down some broad principles for derivatives. Scheduled commercial banks are designated as market-makers for derivatives under strict supervision.

Market-makers may undertake any derivative structured product (that is a combination of permitted cash and generic derivative instruments) as long as it is a combination of two or more of the generic instruments permitted by the RBI.

The market-makers should be in a position to mark-to-market or demonstrate valuation of these constituent products based on observable market prices.

Source: telegraphindia.com

No comments:

Post a Comment