The Reserve Bank (RBI) today slapped a penalty of Rs1.95 crore on 19 banks, including heavyweights SBI, HDFC Bank, ICICI Bank and Citibank, for violating norms on derivatives, an instrument used to hedge financial risks. The fine has been imposed on the banks for selling derivative products to companies and exporters without complying with the instructions issued by the central bank from time to time.

“The penalties have been imposed on these banks for contravention of various instructions issued by the Reserve Bank (RBI) in respect of derivatives,” the RBI said in a release.

The lenders, according to RBI, failed to carry out due diligence with regard to suitability of products and sold derivative products to companies not having risk management policies. They also failed to verify the adequacy of eligible limits before selling derivatives, it added.

Banks sell derivatives to help companies to hedge risks against fluctuations in foreign exchange value and interest rates, and earn a fee.

However, several companies bought currency derivatives for making quick money instead of hedging their risks and suffered losses because of unforeseen fluctuation in foreign exchange value in the wake of global financial crisis in 2008.

Many companies later claimed that they were mis-sold these products by the banks without explaining the risks attached with such instruments and also moved the court to recover the losses. One of the cases pertaining to losses incurred on account of derivatives contract is still pending in the Supreme Court.

While a fine of Rs15 lakh each was slapped on Axis Bank, Barclays, HDFC Bank, ICICI Bank, Kotak Mahindra and Yes Bank, Rs10 lakh each was imposed on Citibank, BNP Paribas, SBI, Credit Agricole -CIB, Development Credit Bank, ING Vysya Bank, Royal Bank of Scotland and Standard Chartered Bank.

Besides, a fine of Rs5 lakh each was slapped on Bank of America, DBS Bank, Deutsche Bank, HSBC and J P Morgan Chase Bank.

RBI had earlier issued show-cause notices to them. When contacted many penalised banks declined to comment on the RBI action.

“On a careful examination of the banks’ written replies and the oral submissions made during the personal hearings, the Reserve Bank found that the violations were established and the penalties were thus imposed,” the central bank said.

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