What changed
Previously, banks could only make direct remittances for payment obligations from commodity derivative contracts. Now, AD Category-I banks can issue guarantees or standby letters of credit for these specific payments, subject to conditions in the circular's annex.
What it means for you
Banks can offer non-funded facilities like guarantees for margin payments on commodity hedging, reducing the need for customers to tie up cash. This expands product offerings but requires strict adherence to board-approved policies, credit exposure limits, and risk-weighting for capital adequacy.
What you must do
- Ensure guarantees/standby LCs are issued only for remittances covered under delegated authority or specific RBI approval for overseas commodity hedging.
- Adopt a board-approved policy defining the nature and extent of exposures for such transactions, treating them as part of customer credit exposure.
- Assign appropriate risk weights for capital adequacy as per extant norms.
- Verify compliance with overseas commodity hedging guidelines and ensure broker's month-end reports are submitted and verified for physical exposure backing.
Who it affects
AD Category-I banks, Resident entities with overseas commodity hedging payment obligations, Corporate treasuries involved in commodity derivative contracts
Can we issue a guarantee for any amount related to commodity hedging?
No, the guarantee or standby LC amount cannot exceed the margin payments made to the specific counterparty during the previous financial year.
What is the maximum tenure for such guarantees?
The guarantee or standby LC can be issued for a maximum period of one year, after marking a lien on the customer's non-funded facility limit.
Do we need to verify physical exposure backing for offshore positions?
Yes, you must regularly verify broker's month-end reports to ensure all offshore positions are backed by physical exposures.