Norms for derivatives dues relaxed

The Reserve Bank of India (RBI) on Wednesday relaxed the prudential norms for banks’ exposure to derivative contracts by allowing the non-payment of dues on a contract made during the period between April 2007 and June 2008 to be classified in a separate account.

The account will be maintained in the name of the client and will be treated as non-performing assets (NPA).

These norms will be applicable to the foreign branches of Indian banks and only for foreign exchange derivative contracts other then forward contracts and plain vanilla swaps and options that may be cleared in future.

RBI said this amount, if overdue for a period of 90 days or more, would not turn other funded facilities into NPA.

Earlier this month, the central bank had said that non-payment of dues on a derivative contract beyond the stipulated period of 90 days would also turn all other funded facilities extended to a client into NPA.

Bankers said the move would result in maintaining the capital adequacy and improving the balance sheet of the lenders. An executive with a private bank said the move is towards funding the loss in the overseas market.

In a previous notification, central bank had said that in cases where the derivative contract provides for settlement before the maturity of the deal, the bank will mark only current dues and not future exposure as an NPA if the dues remain unsettled after an overdue period of 90 days. After 90 days, the amount provided for in the profit and loss account should be transferred to a suspense account, as is done in the case of overdue advances.