Exposure norms for off-balance sheets of banks under review

MONETARY POLICY 2008-09/ POLICY AND THE FINANCIAL SECTOR

Reserve Bank of India, in its annual policy for 2008-09, has said that it will review the existing guidelines for banks' off-balance-sheet exposures such as derivative products. The central bank may prescribe fresh norms to ensure better regulation for these items, if it deems fit.

RBI intends to review current norms regarding conversion factors, risk weights and provisioning requirements for specific off-balance sheet exposures of banks. It will prescribe prudential requirements if it deems appropriate.

The guidelines dealing with off-balance sheet items will be announced by middle of next month.

There has been a rising incidence of losses and write-offs in the global banking system amidst deteriorating credit market conditions. Some financial instruments like swaps, futures contracts, which are off-balance sheet items, used widely to hedge currency risks have contributed to these losses.

For selling these derivative products (an off-balance sheet item), banks may have received hefty fees. But, with serious financial problems in the international market, many Indian corporates are staring at losses that could hurt their balances.

There have been disputes between banks and many of their clients (small and medium size corporates) as to who is responsible for such losses. RBI said that present incentive structure has raised questions over enhancing off-balancing exposures and economising on capital requirements.

With an eye on maintaining financial stability, RBI expects that when banks and their clients follow guidelines in letter and spirit, they will be well equipped to meet any potential consequences.