RBI may announce ceiling on banks exposure to commodity futures

Written by Arun S | New Delhi | Updated: Dec 12 2012, 09:22am hrs
The Reserve Bank of India (RBI) is likely to announce a ceiling on banks' exposure to commodity futures, after the government allowed them to trade in this segment by amending the banking regulation law.

The RBI could also come out with relevant operational guidelines once Parliament approves the Banking Laws Amendment Bill introduced in the Lok Sabha on Monday, a senior finance ministry official said.

Referring to the enabling clause in the Bill for letting banks to trade in commodity futures, the official said it is meant to help banks and farmers, adding the provision was also in line with global practices. The department of financial services has been in talks with the RBI on the guidelines needed in this regard, including the cap on exposure, sources said.

The enabling provision seeks to amend Section 8 of the Banking Regulation Act, 1949, which prohibits banking companies from directly or indirectly dealing in the buying or selling or bartering of goods, except in connection with the realisation of security given to or held by it and in connection with bills of exchange received for collection or negotiation.

The prohibition is despite the Forward Contract (Regulation) Act, 1952, which permits all entities to take part in commodity futures trading. However, banks are permitted to trade in currencies, bonds and shares and can even hold shares in commodity exchanges.

Official sources said the RBI was earlier apprehensive about banks entering the commodities market, given the wild price fluctuations of commodities and the inexperience of the banks about the intricacies of these complex products.

By allowing banks to trade in futures, the finance ministry wants to deepen the commodities market and, in the process, ensure farmers to get better returns for their produce. The ministry is also mindful of the fact that since India has mostly small and marginal farmers, not many of them would be keen on products relating to commodities markets.

Sources said more than the domestic banks, foreign banks are keen to immediately participate in commodities derivatives trading due to their vast expertise in the area owing to their experience in having played in different commodity markets overseas.

Indian banks also may also look at developing the requisite expertise and resources in the business before taking the plunge. Currently, they have some experience in commodities trade, especially in importing and selling pf gold with permission from RBI. Besides, they are also closely involved with farmers due to their lending to the farmers as agriculture is a priority sector. Though most farmers do not indulge in commodities trading, banks are hopeful of developing products for them in the future.