Mumbai: Global banking giant Standard Chartered Plc has come under the supervision of the Reserve Bank of India (RBI) for alleged serious lapses in risk disclosures and internal controls related to derivative products sold to small and medium enterprises (SMEs). While no formal regulatory action has been initiated yet, sources say the RBI is conducting an intensive review of the bank’s operations — a development that signals the regulator’s growing concern over the transparency and customer protection practices of foreign banks operating in India.
According to a Business Standard report, the issue revolves around the sale of complex derivative instruments, particularly Target Redemption Forwards (TRFs), to SMEs — clients who may not have fully understood the potential financial risks associated with such products.
Complex Derivatives, Inadequate Disclosures: The Core Issue
The Target Redemption Forward (TRF) is a structured derivative product typically used by large corporations with high-risk appetite and financial expertise. These instruments allow users to hedge against currency fluctuations, but they can also result in significant losses if the market moves unfavorably.
RBI’s probe found that Standard Chartered sold these instruments to small and medium-sized enterprises, without fully disclosing the extent of the risks involved. The regulator is particularly concerned about:
- Derivative sales practices and whether clients were appropriately profiled and informed
- Risk governance frameworks and internal approval processes for complex product sales
- Reserve maintenance requirements to cover potential losses arising from these contracts
- Accounting treatment of Forward Rate Agreements (FRAs) and related disclosures
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This is not the first time derivative mis-selling has come under the regulatory lens. However, the involvement of a globally reputed bank and the vulnerability of SME clients make this case particularly significant.
Standard Chartered Responds, RBI Stays Silent on Action
A spokesperson for Standard Chartered’s Mumbai office acknowledged that the RBI conducts annual inspections, and stated that any observations from the regulator are usually addressed under routine compliance procedures.
“As far as any specific observation is concerned, we address them in the normal course,” the spokesperson said, adding that no formal action has yet been taken by the RBI.
The bank has been operating in India for 165 years, with a network of 100 branches in 42 cities. It has a strong presence in corporate banking, investment banking, wealth management, and retail banking.
Sources indicate that RBI has not issued any show-cause notice or directive at this stage, but the depth of the ongoing review signals a potentially serious compliance breach. If the findings are significant, penalties or operational restrictions could follow.
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Tightening the Screws: RBI Focuses on Customer Protection and Transparency
In recent years, the RBI has been cracking down on foreign banks over issues related to mis-selling of financial products, especially derivatives. The focus has shifted to ensuring informed consent and full risk disclosure, particularly when selling complex financial instruments to retail and SME clients.
This latest development serves as a strong reminder that banks have a duty to ensure suitability of financial products for their clients — especially vulnerable segments like SMEs that may lack the financial literacy to understand structured derivatives.
“The era of pushing complex financial products without due diligence is over. Regulators are now enforcing both transparency and accountability in financial services,” said a senior financial compliance expert.
With financial stability and customer trust becoming key pillars of RBI’s oversight, the Standard Chartered case underscores the regulatory emphasis on fairness, responsibility, and transparency in India’s evolving banking landscape.