Business Standard

RBI eases commodity derivative deal norms

BS Reporter  |  Mumbai 

allowed to issue guarantees or LCs for payment obligations.

The has allowed banks to issue guarantees or standby letters of credit in support of payment obligations for deals overseas.

Earlier, banks were only allowed to remit funds towards the payment obligations of the commodity importers (primarily oil and metals) for their derivative transactions overseas.

RBI, however, clarified on Monday that such guarantees and LCs will be issued only for payment of margin money against approved commodity hedging activities of companies.

Banking sources said this measure will take the pressure off India’s foreign exchange reserves since the actual outflow of funds from India towards margin payment and final settlement of commodity derivative transactions can be deferred.

This comes at a time when most Indian oil companies are busy booking their oil requirement through forward contracts in the overseas market since crude prices have fallen under $60 per barrel. This, in turn, is putting pressure on the payment of margin money.

Oil companies also will no longer have to rush for foreign exchange at a time when dollar is scarce.

These guarantees and LCs will form part of the credit exposure on customers and should be duly assigned risk weights for capital adequacy purposes, RBI said.

The amount of guarantee/ LC issued for a maximum period of one year will not exceed the margin payments made to overseas counterparty in the previous financial year. For prudence, banks will have to insist on submission of broker ‘s month-end reports duly countersigned by the financial controller to ensure that all offshore positions are backed by physical exposures.

The CFO of a leading crude refiner said this is a significant relaxation for companies hedging their commodity risks in overseas markets. This will also reduce burden on the spot currency market as the actual outflow of funds can be deferred to the time of settlement of the contract.

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RBI eases commodity derivative deal norms

Banks allowed to issue guarantees or LCs for payment obligations.

allowed to issue guarantees or LCs for payment obligations.

The has allowed banks to issue guarantees or standby letters of credit in support of payment obligations for deals overseas.

Earlier, banks were only allowed to remit funds towards the payment obligations of the commodity importers (primarily oil and metals) for their derivative transactions overseas.

RBI, however, clarified on Monday that such guarantees and LCs will be issued only for payment of margin money against approved commodity hedging activities of companies.

Banking sources said this measure will take the pressure off India’s foreign exchange reserves since the actual outflow of funds from India towards margin payment and final settlement of commodity derivative transactions can be deferred.

This comes at a time when most Indian oil companies are busy booking their oil requirement through forward contracts in the overseas market since crude prices have fallen under $60 per barrel. This, in turn, is putting pressure on the payment of margin money.

Oil companies also will no longer have to rush for foreign exchange at a time when dollar is scarce.

These guarantees and LCs will form part of the credit exposure on customers and should be duly assigned risk weights for capital adequacy purposes, RBI said.

The amount of guarantee/ LC issued for a maximum period of one year will not exceed the margin payments made to overseas counterparty in the previous financial year. For prudence, banks will have to insist on submission of broker ‘s month-end reports duly countersigned by the financial controller to ensure that all offshore positions are backed by physical exposures.

The CFO of a leading crude refiner said this is a significant relaxation for companies hedging their commodity risks in overseas markets. This will also reduce burden on the spot currency market as the actual outflow of funds can be deferred to the time of settlement of the contract.

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