RBI for more capital, provisioning on bk derivative exposure

[K.Karthik Raja]

RBI for more capital, provisioning on bk derivative exposure
Friday, May 30

MUMBAI - In a move to discourage banks from taking up large
exposures on their off-balance sheet portfolio, Reserve Bank of India
today increased the capital requirement and provisioning on such
derivative deals.
These derivative deals will attract standard provisioning from
now, RBI said.
"We have been providing general provisioning. The standard
provisioning
will need more capital and therefore will impact the P&L (profit and
loss),"
said a senior official with a private sector bank.
The standard provisioning is likely to be around 40 bps, bankers
said.
"The capital requirement will go up on the derivatives book, but
overall
there will not be any material impact on the capital adequacy," the
official
said.
Recently, many corporates witnessed large mark-to-market losses on
their derivative deals following the global credit crisis. Banks have
also
incurred MTM losses on their credit derivatives exposure as credit
spread
widened globally.
.
PROVISIONING
Besides standard asset provisioning, RBI has also suggested
doubling the
credit conversion factor.
Higher credit conversion factor means higher credit equivalent of
the
derivatives exposure, which will in turn increase the capital
requirement.
Despite the higher capital requirement such derivatives deal will
still
be profitable, the official said.
.
CASH SETTLEMENT
In the draft norms, RBI also said companies can restructure
derivatives
contracts only on cash settlement basis.
"Currently, companies, after suffering a mark-to-market loss on a
derivatives deal, restructure it to absorb the loss and then move on
to the
next transaction," said a foreign bank treasury official.
"RBI's guideline will now give companies less incentive to go for
derivatives transaction as they will now have to settle the MTM loss
first
and can't carry forward it," the official said.
"This is done so that the companies are regularly updated about
their MTM
position and there are no huge risk on banks' books," said a state-run
bank
official in the risk management division.
RBI reiterated that amount receivables under derivatives
transactions
should be considered as per the 90-day rule of evaluating non-
performing
assets.
The modifications will be effective from 2008-09, RBI said.
The other points in the draft norm are:
.
* Credit exposure should be computed using 'Current Exposure Method'.
* Capital adequacy of rate, FX derivatives deals should also be under
'Current Exposure Method'. End
.