The Reserve Bank of India (RBI) on Monday eased the norms for banks to restructure derivatives contracts by allowing them to partially or fully terminate the contract before maturity.
Such termination would not be treated as restructuring of the contract provided all other parameters are unchanged, the central bank said. Therefore, banks need not settle the mark-to-market value at the time of termination through cash, RBI said.
?In such cases, if the MTM value of the derivative contract is not cash settled, banks may permit payment in instalments of the crystallised MTM of such derivative contracts (including Forex Forward Contracts),? the central bank said in a notice.
The RBI has allowed banks to recover the mark-to-market hit in instalments from their clients, subject to some conditions.
The central bank said that banks must have a board approved policy for the same.
Banks must allow repayment in instalments only if they are certain of the company?s paying capacity and also the payment period must not exceed that of the tenure of the contract.
Further, if the company is unable to pay any instalment within 90 days from the date of the partial or full termination of the contract, the receivable must be classified as a non-performing asset by the bank.
Earlier, companies were reluctant to reduce their notional exposure through such hedging due to the diktat of cash settlement.
The rupee?s sharp fall in the recent months has led to many companies taking a severe hit on their forex exposure, mainly through derivatives. The latest move is expected to enable banks and companies to exit forex derivatives and limit losses.
