RBI tightens its derivative exposure norms for banks

the losses suffered by some banks and corporates in derivative deals. According to the RBI, credit exposures computed as per the ‘current exposure method’ — arising on account of the interest rate and foreign exchange derivative transactions, and gold — will attract provisioning requirement as applicable to the loan assets in the ‘standard’ category of the concerned counterparties. “All conditions applicable for treatment of the provisions for standard assets would also apply to the provisions for derivative and gold exposures,” it said.

The RBI has made it clear that in respect of derivative transactions, any amount receivable by the bank, which remains unpaid for a period of 90 days from the specified due date for payment, will be classified as non-performing assets (NPAs) as per the RBI’s prudential norms on income recognition, asset classification and provisioning. Any restructuring of derivative transactions, including forex contracts, should be carried out only on cash settlement basis.

The RBI also said no potential future credit exposure would be calculated for single currency floating/ floating interest rate swaps. The credit exposure on these contracts would be evaluated solely on the basis of their mark-to- market value. It said potential future exposures should be based on effective rather than apparent notional amounts. In the event that the stated notional amount is leveraged or enhanced by the structure of the transaction, banks must use the effective notional amount when determining potential future exposure. For example, a stated notional amount of $1 million with payments based on an internal rate of two times the BPLR would have an effective notional amount of $2 milllion.

Last year, banks had been selling forex derivative products to corporates, which bought them in speculation of making good money as they had in the past. However, the turmoil in the global credit/derivative market following the surfacing of the subprime crisis in the US upset the plans of Indian firms. A decline in the value of the dollar against the yen and the franc hit Indian corporates which have used these currencies to swap their rupee denominated debt. While many firms have gone to the court against banks, others have started talks with their banks for restructuring their currency deals. As per the Bank for International Settlements’s 2007 triennial survey, daily turnover in India’s over-the-counter forex derivatives soared to $24 billion from $3 billion in 2004.

New order

• Additional provisioning requirements in case of exposure to select sectors

• Interest rate and foreign exchange derivative transactions and gold will attract provisioning

• In derivative deals, any amount which remains unpaid for a period of 90 days will be classified as non-performing asset