Banks seek clarification on RBI forex measures

Banks seeks clarification on implementation of RBI forex measures - A teller counts U.S. dollar bank notes at a money changer — Banks seeks clarity from RBI on implementation of latest regulatory measures

Mumbai: Indian lenders have, through an industry body, sought regulatory clarity on the modalities of implementing the latest currency-supporting measures. These include the formula to calculate the newly introduced 20% foreign exchange risk reserve (FERR), the impact of the steps on liquidity ratios, and the methodology to be followed while passing on the costs to customers.

“The new rules have set a notional value limit of $2 million on all foreign exchange derivative contrasts, but there is still lack of clarity on how this will be implemented,” said a person aware of the letter by the Foreign Exchange Dealers’ Association (FEDAI) to the central bank.

There are specifics on which bankers need clarity.

Also read: Banks may explore easier forex hedging amid RBI curbs

“For instance, if a client takes a $2-million exposure through two different banks, he is technically within the limit at both, but above the limit on a gross basis. How should banks calculate that and which bank should maintain the FERR?” asked the person cited immediately above. “Even if it is with the same bank but the exposures are a few days apart, will that be treated as two separate exposures?”

On Saturday, among the measures to dissuade speculative currency trades, the Reserve Bank of India (RBI) restricted the rebooking of cancelled contracts and imposed a 20% cash reserve requirement on forex derivative contracts above $2 million.

The RBI is likely to release its FAQ on the new measures soon.

After a meeting on Sunday, FEDAI members have sought clarification on the scope of FERR, the $2 million threshold, liquidity and balance sheet treatment, operational instructions on how the deposits will be maintained, implementation timeline and transition period and customer impact.

'Multiple Queries'

“Bankers have sought clarification on hedges of interest/coupon payments, including external commercial borrowing (ECB) interest,” said a second person aware of the details. “Clarifications have been sought on the classification of principal and interest payments relating to foreign-currency loans, ECBs, bonds, debt investments and investment income, as well as on the treatment of hedges on current account and capital account transactions.”

Banks have sought clarification on levy calculations if the import and export flows offset each other.

“The 20% levy will ultimately make import forward dollar purchases more expensive by 12 to 13 paise per month and about 150 basis points in terms of interest rates. Banks are still unclear on how all these calculations will work,” said a third person.

Banks have also sought clarification on whether the cash balance maintained with RBI as FERR would qualify as high-quality liquid assets (HQLA) and whether they would form part of the CRR or SLR the lender must statutorily maintain.

“Some banks have asked whether banks will be permitted to borrow against the FERR balance, including through repo, the Marginal Standing Facility (MSF) or any other RBI liquidity facility,” the first person cited above said.

Banks have overall sought more time to make the necessary system changes, establish controls, amend policies and procedures, update customer documentation and communicate the requirements internally and to customers.

“Some have sought a short transition period to complete implementation arrangements like a period of seven days to implement these guidelines,” said the second person aware of the details.