The Hindu Business Line : Derivatives: Norms for off-balance sheet exposure tightened

Mumbai, Oct. 13 Overdue receivables representing positive mark-to-market (MTM) value of a derivative contract should be treated as a non-performing asset, if these remain unpaid for 90 days or more.

In a notification on the prudential norms for off-balance sheet exposure of banks, issued on Monday, the Reserve Bank of India said that all other facilities granted to the client should also be classified as NPAs, based on the principle of borrower-wise classification.

If the bank has also extended other services to the customer, such as cash credit or overdraft facility, the receivables mentioned may be debited to that account on due date and the impact of its non-payment would be reflected in the cash credit or overdraft facility account.

In cases where the contract provides for settlement of the current MTM value of a derivative contract before its maturity, only the current credit exposure (not the potential future exposure) will be classified as an NPA after an overdue period of 90 days, the RBI clarified.

These being overdue receivables, it is possible that bank may have already booked this unreleased income. In that case, after the 90-days overdue period, the amount which has already been included in the bank’s profit and loss account should be reversed and held in a ‘Suspense account,’ in the same manner as is done in the case of overdue advances.

Restructured derivative

In cases where a derivative contract is restructured, the MTM value of the contract on the date of restructuring should be cash settled. For this purpose, any change in any of the parameters of the original contract would be treated as a restructuring.

These instructions will also be applicable to the foreign branches of Indian banks, said the central bank.

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