Banks hit out at RBI's draft on derivatives

Banks have reacted strongly against the Reserve Bank of India's (RBI) draft proposals on derivatives trading, saying it was an attempt at micro managing their functions.

They said there was no need for the RBI to "dictate the nature of products and tenure of deals" after having directed them to put in place appropriate risk management structure for derivatives.

Most banks are also up in arms against a proposal that long-term exposure in a swap could mean residual maturity of three years or more. They said this would be a deterrent in providing derivatives products to small and medium sized corporates.

Most of the banks, especially foreign, may have to review their derivatives books following the new guidelines as the RBI proposes to cap their derivatives exposures, measured in terms of present value of the deal, within 0.25 per cent of their net worth.

Banks are opposing the minimum residual maturity of three years in a swap deal as majority of the clients are SMEs and most do not have a "good" rating. Banks feel it would be difficult for them to maintain an exposure on such entities for a period of three years.

While the RBI has put in place the requirement to avoid systemic risk in case of default, banks feel this could restrict opportunity for selling such products.

Another issue that has irked banks is the RBI holding them responsible for compelling corporates to disclose their derivatives positions. It should be done in association with the Institute of Chartered Accountants and others.

Banks are even required to give a written undertaking that the products offered by them comply with the existing norms which some feel could lead to legal hassles. Moreover banks can at best ask for a declaration that their corporate clients have understood the products and risks involved it.