At a time when companies are reeling under severe liquidity strain and high volatility in commodity prices, the Reserve Bank of India has relaxed the norms for remittances related to commodity derivative contracts. Banks can now issue guarantees or standby letters of credit in lieu of making direct remittances towards payment obligations arising out of commodity derivative transactions entered into by customers with overseas counterparties.
The relaxation will give greater flexibility to resident entities that have such payment obligations related to commodity derivative contracts. The guarantees or standby letters of guarantee can be issued only where the remittances are covered under the delegated authority or under the specific approval granted for overseas commodity hedging by the Reserve Bank.
The Reserve Bank says that the standby letters of credit or bank guarantees may be issued for the specific purpose of payment of margin money in respect of approved commodity hedging activities of the company and for an amount not exceeding the margin payments made to the specific counterparty during the previous financial year. The validity of such guarantees or standby letters of credit should not exceed one year.
The banks issuing such guarantees or standby letters of credit must have a Board approved policy on the nature and extent of exposures that the bank can take for such transactions and should be part of the credit exposure on the customers. The exposure should also be assigned risk weights, for capital adequacy purposes as per the extant provisions.
The banks are also required to ensure that the guarantees or letters of credit are issued after marking a lien on the non-funded facility available to the customer (letter of credit / bank guarantee limit) and that the guidelines for overseas commodity hedging have been duly complied with.
They have to also ensure that broker's month-end reports duly confirmed / countersigned by the financial controller of the resident entity have been submitted and that such reports are regularly verified by the banks to ensure that all off-shore positions are / were backed by physical exposures.
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