RBI eases derivative contract norm

Banks can end deal without provisioning burden

Banks need not classify hedging of derivative contracts that are terminated partially or fully as restructured accounts. The move, announced by the Reserve Bank of India (RBI) on Monday, would ease banks’ provisioning burden.

Banks have also been permitted to allow payments in instalments if the mark-to-market (MTM) value of the terminated derivative contract, including the foreign exchange forward contract, is not settled in cash.

However, banks have been asked to formulate an appropriate policy, approved by the board, for such instalment payments. The repayment period will not extend beyond the maturity date of the contract.

“Banks should permit repayment in instalments only if there is a reasonable certainty of repayment by the client,” RBI said in a notification on Monday.

In addition, the repayment instalments for the MTM items should be uniformly received over the remaining maturity of the contract and its periodicity should be at least once in a quarter, the central bank said.

Earlier, banks had to make provisions for any change in the parameters of a derivative contract, as it was treated as restructuring.

Also, the MTM value of the contract on the date of restructuring needed to be settled in cash.

When the client is permitted to pay the MTM in instalments, RBI said, it should be done within 90 days of the date of partial or full termination of the derivative contract. If the amount is overdue for 90 days from the date of partial or full termination of the derivative contract, the receivables are to be classified as a non-performing asset (NPA).

Even after the derivative contract was terminated, partially or fully, and MTM was permitted to be repaid in instalments, if the client subsequently decides to hedge the same underlying exposure again by entering into a new contract with a bank, then banks can offer derivative contracts. But the client must have fully re-paid the instalments corresponding to the derivative contract previously used to hedge the underlying exposure.