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“Risk management is somewhat like apple pie: we're all in favour of it so long as someone else does all the cooking and it comes free. But risk management is not a free lunch: and the more elaborate the pie, the more expensive it is.” (Clifford Smoot Bank of England Financial Risk Management Supplement Risk, July, 1996)

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Can it happen? Is it really true?

I am forced to think so after seeing the spate of cases filed against banks like ICICI Bank, Axis Bank and Kotak Mahindra Bank by their customers – some of them are the respective banks’ prime customers and well-known names in the market.

These companies have alleged that their banks had ‘mis-sold’ the derivative products to them, without explaining the impact of possible losses. In fact, a company had claimed that its officials had entered into unauthorized transactions with their bankers!

Well. What would have happened if these companies made a big killing and booked huge profits out of these transactions? Would they have turned them into these banks because their banks have not explained the impact of possible profits?

Some of these companies are under the mistaken impression that the appropriateness of their transaction lies at the bankers’ end rather than at their doorsteps. And for coming to this conclusion, they rely upon the now famous US court case involving a leading company and a leading bank, which ultimately led to out of court settlement.

Well. This transaction took place at a time when the derivative knowledge was evolving and was in the domain of a very few people in the market place and naturally the customers had to depend upon the advice and guidance of their bankers.

Now, even a school final student can easily understand and explain what a derivative transaction is and what are its impacts and implications.

Therefore, to take cover under the argument that the banks sold the derivative products to the customers without explaining the impact of possible losses is a lame excuse, which may not stand the scrutiny of the courts now.

If these companies are so naive to claim so now, the customers of these companies should start to question their experience, knowledge, dependability and maturity. Their customers may come to the conclusion that these companies will stoop to any levels to make money.

Well. Coming to the banks that have been hauled to the court now –they need not bother if they have acted in good faith and made their best pitch while dealing with these customers.

However, the other banks may learn a lesson or two – they will offer these products to their customers only after taking a pile of documents containing all possible disclaimer clauses protecting their interests. The banks will ask powerful questions to help the customers see the possible consequences, good or bad, of their choices / perspectives.

This may slow down to a certain extent the growth of this market. But it may be good in the long run