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Our Bureau

Mumbai, Nov. 10 The Reserve Bank of India (RBI) on Monday gave some relief to domestic entities having payment obligations arising out of commodity derivative hedging transactions entered into by them with overseas counter-parties.

The central bank has allowed authorised dealer (AD) Category -I banks to issue guarantees/ stand-by letters of credit to cover their payment obligations towards margin money requirements in lieu of direct remittance. Importers of base metals and edible oils are expected to benefit the most from this relaxation.

“Until now, domestic entities entering into derivatives transactions with overseas counter-parties were required to make a remittance towards margin money. Henceforth, they can rely on guarantees or stand-by letters of credit to take care of their margin money requirements,”said Mr J.S. Chiney, General Manager, Bank of India.

“he confidence of overseas suppliers on importers has been undermined by the recent financial turmoil. The RBI move will go a long way in reinforcing faith of the suppliers,” said Mr Sushil Sinha, Assistant General Manager, Karvy Commodities.

According to the RBI, AD Category-I banks can issue guarantees/standby letters of credit for the specific purpose of payment of margin money in respect of approved commodity hedging activities. Banks will have to ensure that the guidelines for overseas commodity hedging have been duly complied with.

The standby letter of credit/bank guarantee, which can be issued for a maximum period of one year, after marking a lien on the non-funded facility available to the customer, can be issued for an amount not exceeding the margin payments made to the specific counter-party during the previous financial year. Banks are required to ensure that broker’s month-end reports duly confirmed / countersigned by the corporate’s financial controller have been submitted.

Moreover, brokers’ month end reports will have to be regularly verified by banks to ensure that all offshore positions are/were backed by physical exposures.

More Stories on : Derivatives Markets | RBI & Other Central Banks

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