The Reserve Bank of India draft guidelines on prudential norms for off-balance sheet exposure of banks, including derivative exposure, released on Friday are set to increase banks’ provisioning requirements once they come into effect.
Off-balance sheet exposure includes interest rate and foreign exchange derivative transactions. The draft guidelines propose additional risk weights and provisioning requirements for banks involved in these transactions. The draft guidelines were released for comments from banks.
Banks should use the "current exposure method" to compute their credit exposure in interest rate and foreign exchange derivative transactions and gold and to calculate the credit equivalent amount for capital adequacy requirements under Basel-II, the RBI said. The credit exposure arrived at will be subjected to standard provisioning.
"Current exposure method" is defined as a sum of current credit exposure and potential future credit exposure of these forward contracts.
The guidelines in case of exposure to select sectors include additional risk weight and provisioning requirements, the RBI said.
The draft norms also proposed that any restructuring of derivative transactions, including foreign exchange contracts, should be carried out only on cash settlement basis. If the receivables are due for more than 90 days they will be considered as non-performing assets or bad loans.