The Hindu Business Line : Off-balance sheet exposures deemed as credit

What it means
Interest rate, forex deals, future credit exposure come within the single borrower limit of 15 per cent of capital owned funds.
Any restructuring of derivative deals shall be carried out only on cash settlement basis.

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Mumbai, May 30 In a measure to restrict banks from taking undue risk in derivatives, the Reserve Bank of India has tightened prudential norms for banks’ off-balance sheet deals.

As per the guidelines issued today, the prudential norms applicable to standard credit exposures will also be applicable to off-balance sheet exposures.

Off-balance sheet exposures include interest rate and foreign exchange derivatives transactionsThe modified norms will come into effect from the next fiscal, said an RBI circular.

According to a senior bank official, this means that banks will have to include interest rate and foreign exchange derivative transactions and potential future credit exposure within the single borrower limit of 15 per cent of capital owned funds.

The provisioning for such assets will also be the same as that applicable to standard assets.

The aim behind RBI’s move is to ensure that banks do business within their capacity. A bank with small networth may now have to review its lending and reduce it if necessary, the official said.

For the purpose of capital adequacy, derivative transactions should be converted into the equivalent of credit and the risk weight should be calculated on that.

NPA classification

With regard to asset classification of receivables under the derivatives 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, the RBI said.

Any restructuring of derivatives contracts, including the foreign exchange contracts, shall be carried out only on cash settlement basis.