Interestingly, no bank wanted to talk about the court cases. Kotak Mahindra, which had sold the derivatives to Hexaware, settled its dispute with the company by sharing the loss. Meanwhile, to cut losses some of the foreign banks are advising their clients to get into new contracts by shifting currencies. And the more conservative Indian banks are cutting the losses by closing the contracts. “I have cut 120 option contracts in the past few months,” said the chairman of a large public sector bank who did not wish to be identified. According to bankers, the companies need not worry too much at this point as every thing is not lost.
“Accounting norms do not require corporations to MTM their foreign exchange contracts. Hence, clients would need to pay as per the maturity of these transactions and not immediately,” said Chanda Kochhar, joint managing director, ICICI Bank. Accounting Standard (AS) 30 comes into effect in 2011 and till such time, firms are not required to book their derivatives losses. However, Sanwalka of KPMG said that if the derivatives losses are speculative in nature, firms need to book losses immediately. Both Rajwade and Desai say potential losses of some of the firms have already wiped out their entire net worth. Historically, losses for Indian banks on foreign contracts have been insignificant, but if some companies go bankrupt on account of this, banks will be badly hit as they run the risk of credit defaults.
Under the law, Indian banks cannot have a naked exposure to cross-currency derivatives. This means all cross-currency options and swaps of their customers are hedged back-to-back with the same tenure and amount with foreign banks. So, if a company defaults, banks will have to pay up to settle the contracts with counterparties. “The litigations may continue for five years even after the expiry of the contracts. If the banks need to settle such contracts on their own, their profitability will be hit,” said Sanwalka.
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