Date:09/01/2009 URL: http://www.thehindu.com/2009/01/09/stories/2009010955820600.htm

Tamil Nadu

Banks should be advised to keep forex derivatives in suspense account

Staff Reporter

Tirupur: Tirupur Exporters Association has urged the Central Government to advise all banks to keep the overdue receivables from derivative contracts in a ‘suspense account’ without deducting interest rates.

In a memorandum submitted to Union Commerce Minister Kamal Nath, president of TEA A Sakthivel, who is also the president of FIEO, said that though Reserve Bank of India had come out with a directive relaxing the prudential norms for off-balance sheet exposure of banks pertaining to losses from ‘exotic forex derivative products’, it was yet to be followed by various financial institutions.

According to RBI’s instructions, all foreign exchange derivative contracts other than the forward contract and plain vanilla swaps that were entered into during April 2007 to June 2008 would be parked into a separate account maintained in the names of the clients.

Mr Sakthivel pointed out that scrupulous following of the RBI’s guidelines was essential considering that the exporters were ‘lured’ by the banks into forex derivative contracts by capitalizing on the adverse fiscal situation prevailed when the rupee appreciated against the dollar.

The exporters thus suffered huge losses in forex derivative products, which was projected as a financial contract to hedge against the risk of losing money because of appreciation in rupee.

He requested the Central Government to ensure that the amount kept in the ‘suspense account’, even if overdue for 90 days or more, should not be treated as Non Performing Asset (NPA).