Dubai: Investors, who took exposure to leveraged non-resident rupee deposit products in India and stand to lose heavily from the recent fall in the rupee, told Gulf News that banks sold these products as simple fixed deposits and now they stand exposed to huge currency risks.
Banks, on the other hand, said investors had been made aware of the risks of currency depreciation and were advised to take hedges against exchange rate losses.
A few bankers who spoke to Gulf News on condition of anonymity said while they are fully aware of the difficulties faced by some of their customers, the structure of the products makes them helpless.
"High returns come with high risks"
“Leveraged products are sophisticated and come with relatively high returns and risks associated with such products. By the very fact that these products come with [a] forex hedge at a cost on customer, it is difficult to imagine [that] these customers were not aware of the risks,” said a senior investment specialist at a local bank.
UAE bank customers, especially the affluent segment, are not new to such risky investments wiping out their entire savings. In 2008, following the financial crisis, a number of investors were hurt by leveraged investment products sold by banks in the country.
Speaking on condition of anonymity, an investor with close to a million dollars in exposure said that his bank put the blame squarely on him, saying the client was aware of the risks when the signed on the dotted line.
In most of these cases, banks are protected by legally binding contracts.
However, some investors allege that these products were sold without adequately explaining the potential risks.
In the past, many such investment products resulted in massive client losses because of the lack understanding of the underlying risks by both the sales teams of banks and their customers.
“It was a clear case of mis-selling. When they sold the products, relationship managers spoke only the brighter side of the investment and never made us aware that we are taking exposure to a highly risky currency derivative to take advantage of interest rate arbitrage,” said an investor
Clients also allege that banks are unwilling to pitch in financially to lessen their clients’ losses as they have no ‘legal’ obligation to do so.
“The overzealous enthusiastic relationship managers who presented and sold the product as a ‘no-brainer’ to their clients now shrug their shoulders saying ‘nobody can predict the market’ and [make] other lip service excuses,” another investor said.
"Banks should share the burden"
Many investors said banks should share some of the burden in this difficult situation. While some of them have called for the sharing of additional hedging costs, some said banks could chip in by providing interest free loans for re-hedging.
In the days ahead, investors affected by the leveraged products plan to approach the Central Bank of UAE to seek help in mitigating risks.
While some investors are seeking an investigation into the selling practices of banks, some others said the incentive structures of banks may be prompting some employees to indulge in reckless selling practices.