CBI investigating role of banks in multi-crore foreign exchange losses to customers on derivative products sold by the banks

21 Feb 2009



Following an Orissa High Court order, the CBI has started
investigation into the role of banks in multi-crore foreign
 exchange losses suffered by customers, who bought derivative
 products sold by the banks. Sources said while CBI has already
 questioned the officials of a top public sector bank, it might
 call officials from other banks too for questioning.

The agency will conduct investigations into the dealings of 22 banks.

Meanwhile, sources said the Indian Banks’ Association (IBA) was
likely to file a petition with the Supreme Court for a stay on the CBI probe.

The high court directive in December was in response to a 

writ petition filed against the government by an individual alleging

that banks were selling products on the basis of a wrong forecast 

hat the rupee will strengthen against the dollar. Both CBI and the 

Enforcement Directorate (ED) submitted their preliminary reports last November.

Banks are alleged to have offered structures in violation of “extant” 

regulations, which resulted in increased risk and net receipt of premium. 

Besides, the lenders did not verify the underlying exposure, the 

Reserve bank of India (RBI) in its report to CBI had said.

The RBI report had pointed out that banks failed to 

carry out proper due diligence regarding user appropriateness 

and suitability of the product offered. Besides, the banks 

did not obtain written acknowledgement from the clients about

their understanding of the risk involved.

The booking of contract between banks and customers took 

place on the past performance basis beyond the 50 per cent 

eligibility limit and also without obtaining a certificate from 

a chartered accountant. 

“Even when the transactions were based on 

underlying exposure, the banks relied on photocopies of documents…

This led to misuse by clients who used photocopies of the same 

underlying to enter into different contracts with different banks, 

which resulted in manifold increase in their losses,” 

the summary of RBI report submitted by CBI said.

CBI contended during the high court proceedings that 

the derivative contract entered into by various banks might 

be looked into by RBI and ED on bank-to-bank basis and, 

if the exercise revealed commission of offense under the I

ndian Penal Code and the Prevention of Corruption Act,

then CBI may look into the case.

Though RBI in its report has maintained that 

“losses suffered by the customers may not represent

the gains made by the banks” and that the issues were not

“systemic”, it said that an inquiry by the inter-departmental group had 

“identified violations which were serious in nature and were being 

examined for further action against the banks concerned”.