RBI gets tough on off-book bank exposure

Written by Banking Bureau | Mumbai, May 30 | Updated: May 31 2008, 05:56am hrs
In a bid to minutely monitor off-balance sheet exposures of Indian banks, the Reserve Bank of India (RBI) has issued new draft norms to review the current stipulations and prescribed prudential requirements. The move comes close on the heels of losses reported on forex derivatives by many banks and their corporate clients.

The new norms propose modifications in conversion factors, risk weights and provisioning requirements for specific off-balance sheet exposures of banks. Any restructuring of the derivatives contracts, including the foreign exchange contracts, shall be carried out only on a cash settlement basis, RBI said on Friday.

In derivative transactions, any amount receivable that remains unpaid for 90 days from the specified due date for payment will be classified as a non-performing asset of the bank as per the Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to the Advances Portfolio.

The modifications will come into effect from the financial year 2008-09. The banks will, however, have the option of complying with the additional capital and provisioning requirements arising from these modifications in phases, over four quarters, ending March 31, 2009.

RBI has, in its draft guidelines, said that for the purpose of exposure norms, banks shall compute their credit exposures, arising from interest rate and foreign exchange derivative transactions and gold, through the current exposure method.

For the purpose of capital adequacy also, all banks, both under Basel-I and Basel-II frameworks, will use the current exposure method to compute the credit equivalent amount of the interest rate and forex derivative transactions and gold. Credit exposures computed by the current exposure method shall also attract provisioning requirement applicable to loan assets in the standard category of the concerned counterparties.