MUMBAI: Standard Chartered Bank – StanChart, one of India’s oldest foreign lenders, is under regulatory scrutiny over its sale of complex derivative products to small and medium-sized enterprises (SMEs), with the Reserve Bank of India (RBI) reportedly probing whether the bank adequately disclosed the risks involved.
According to people familiar with the matter, RBI has raised concerns around the sale of Target Redemption Forwards (TRFs) by StanChart – a structured derivative instrument known for carrying the risk of significant losses.
While TRFs are typically used by sophisticated corporates to hedge foreign currency exposures, sources indicate that some SME clients may have been sold these contracts without full awareness of the downside risks.
The RBI’s inspection, part of its regular supervisory cycle, is ongoing and focused on both the bank’s marketing of derivative products and its internal risk governance mechanisms.
As of now, no formal enforcement action has been taken, but the matter is being closely watched by financial sector observers.
TRFs, commonly structured as exotic currency derivatives, offer upfront benefits like better hedging rates or lower initial costs.
TRFs could hand out losses
However, they also come with embedded features that can lead to exponential losses if currency movements go against the client’s position. These instruments gained notoriety during the global financial crisis when several Indian exporters suffered heavy losses after betting incorrectly on the rupee.
This recent scrutiny by the RBI echoes past episodes involving complex derivatives. While the IndusInd Bank case earlier this year involved governance lapses, the concerns around Standard Chartered focus specifically on product suitability and sales practices – whether a bank is matching financial products to clients’ risk appetite and understanding.
In addition to derivatives, the RBI is also said to be reviewing the bank’s treatment of forward rate agreements in past financial statements and the adequacy of reserve maintenance. These technical matters relate to how the bank accounted for certain financial contracts and ensured liquidity buffers – issues crucial to systemic stability.
In response to queries, a spokesperson for Standard Chartered Bank said in a written statement: “The RBI conducts annual inspections of banks. While we do not comment on specifics, any observations are highlighted and addressed as part of the normal process.”
The London-headquartered bank has been operating in India for over 165 years and currently has 100 branches across 42 cities.
Its Indian operations are focused on corporate and investment banking, wealth management, and retail banking. India remains one of Standard Chartered’s most important emerging markets, though its market share has been under pressure in recent years due to the aggressive expansion of both private domestic banks and newer foreign entrants.
The developments come at a time when the RBI has been urging banks to improve transparency and ensure customer protection, especially in segments dealing with financially less-sophisticated clients.
Over the past year, it has stepped up enforcement around mis-selling and operational risks, often in response to consumer complaints or supervisory findings.
