Banks' exposure to derivatives may be capped

RBI to pass norms for all foreign currency derivatives.

The Modesty Depository Financial Institution of Republic Of India is planning to pass the norms for all foreign currency derivatives. The move could increase the provisioning demands and curtail banks' exposure to recognition derived functions and currency and involvement charge per unit structures.

Sources familiar with the developments said the cardinal depository financial institution have sought information from Banks to measure their sum exposure to foreign currency derivatives, both in the domestic and in the abroad markets.

While exposures in the domestic marketplace associates mainly to involvement charge per unit and currency options and swaps, international investing includes recognition derived function constructions like credit-linked short letters based on foreign currency loans and chemical bonds raised by North American Indian companies abroad.

In addition, run batted in have also asked Banks to explicate the process adopted for "marking to market" the portfolio for evaluation before the end of the fiscal twelvemonth 2007-08.

Based on the exercise, the banking regulator is likely to restrict the degree of depository financial institution exposure to forex derived functions of any kind. It may also stipulate rigorous hazard direction norms for Banks to come in into derived functions purely for trading or bad purposes.

If run batted in travels ahead with the move, the cap would be kindred to the ceiling on equity marketplace exposure. run batted in have asked Banks to restrict their working capital marketplace exposure to 40 per cent of their nett worth, with direct exposure limited to 20 per cent.

In its review of the banks, run batted in have got establish that most of the Banks have entered into derived functions as bad minutes and not purely for hedge the existent recognition or investing portfolio.

Speculative dealing is made to purely derive out of unwanted motions in currency or involvement charge per unit without any implicit in position. Essentially, a depository financial institution should come in into such as minutes to protect its portfolio from involvement charge per unit or currency hazard or recognition default risk.

As portion of the projected evaluation norms, run batted in could also inquire Banks to tag to marketplace the derivative portfolio maintained in the held-to-maturity (HTM) category. The move would convey Indian norms at par with international best practices, said a source.

Globally, heavy notional losings are pared by shifting the investing from HTM to available for sale (AFS). In the present unit of ammunition of turbulency in the fiscal markets, most planetary giants have got had to compose down the value of their investing owed to terms fluctuations, most of which is notional.

At present, Banks are putting derived functions in the "held to maturity" class since these are not traded. As per the current evaluation norms, any instrument which is not traded is set into HTM class and this demand not be valued.

Market-based valuation and proviso for losings is only done for portfolio under "available for sale" category, which is actively traded by banks. While additions are notional in the marked-to-market exercise, losings have got to be provided for.

At present, beginnings said, most Banks did not have got a theoretical account or evaluation of recognition derived functions since there was no marketplace or instrument in India. As a result, there was a demand for uniform evaluation norms for derivative instruments which, at present, changes across banks.

Sources said run batted in may also inquire the Institute of Chartered Accountants of Republic Of India to work our separate accounting criteria for evaluation of recognition derivatives.

At present, accounting for involvement charge per unit and currency derived functions are covered under the new accounting criterion – arsenic 30 and arsenic 31.

Credit derivative exposure and losings on such as investing is a new phenomenon for the Indian Banks as a radioactive dust of the sub-prime crisis globally. In the domestic market, most of the investing in forex derived functions have turned into notional losings because of the harmful motion in currencies like the Swiss franc and the Euro.