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Forward Contracts - RBI Guidelines 1 Ashit Hegde.

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Presentation on theme: "Forward Contracts - RBI Guidelines 1 Ashit Hegde."— Presentation transcript:

1 Forward Contracts - RBI Guidelines 1 Ashit Hegde

2 What is a Forward Contract? It is an agreement to buy or sell a specified quantity of an asset at a certain future date for a certain price agreed upon now. Ashit Hegde 2

3 I.Contracted Exposures - These may be hedged subject to documentary evidence and quarterly CA certificate. These contracts maybe freely cancelled and re-booked. II. Probable exposures based on past performance - A)For Exporters - The eligible limit will be, Average of past 3 years Exports OR Previous year’s Actual Exports. - Whichever is higher. Cancellation - Up to 75 percent 3 Ashit Hegde

4 B)For Importers : 50 percent of the average of the previous 3 years imports, OR 50 percent of the previous years imports Whichever is higher. (w.e.f May 27 th, 2014) Cancellation - Up to 75 percent III. Resident Individuals, Firms and Companies - USD 250,000/- on self declaration basis. Normally, these contracts will be on deliverable basis and cannot be cancelled 4 Ashit Hegde

5 Provisioning Requirement for Exposures to entities having Unhedged Foreign Currency Exposure (UFCE) (RBI Circular dt Jan 15,2014 effective from 1 st April 2014) Read with Circular dt June 3 rd, 2014 Ashit Hegde 5

6 Computation Methodology : 1.Ascertain Gross Sum of all items on the balance sheet that have impact on P/L ac due to Movement in Exchange Rates. This will be Foreign Currency Exposure (FCE) 2.Exclude all hedged exposures (Financial Hedge and Natural Hedge) E.g. Of Natural Hedge - Export Revenues Vs. Repayment of ECB. (within same year) 3.Estimate the likely loss based on largest annual volatility seen in USD – INR during last ten years. Volatility figure will be provided by FEDAI. 4. Compute this loss as a percentage of EBID. Ashit Hegde 6

7 Additional Provision Needed - Up to 15 percent - NIL More than 15 to 30 pc -20 bps More than 30 pc to 50 pc-40 bps More than 50 pc up to 75 pc - 60 bps More than 75 pc -80 bps Risk Weight – For 75 pc and above -25 % increase in Risk Weight Ashit Hegde 7

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