What changed
Previously, any change in derivative contract parameters was treated as restructuring requiring cash settlement of MTM. Now, partial or full termination to reduce notional exposure is not restructuring if other parameters remain unchanged. Banks can permit instalment payments of crystallized MTM under board-approved policies, with specific NPA and accounting rules.
What it means for you
Banks gain flexibility to help clients reduce hedging exposure without triggering restructuring. Instalment repayment of MTM losses can ease client cash flow, but strict NPA classification at 90 days overdue and reversal of accrued MTM from P&L require careful monitoring. This aligns off-balance sheet exposures with standard credit risk management.
What you must do
- Update board-approved policy to cover partial/full termination and instalment repayment of crystallized MTM.
- Ensure repayment instalments are uniform, at least quarterly, and do not extend beyond contract maturity.
- Classify crystallized MTM receivables as NPA if overdue 90 days from termination or instalment due date.
- Reverse accrued MTM from P&L to 'Suspense Account - Crystallised Receivables' upon NPA classification.
- Verify full repayment of outstanding instalments before allowing new hedge contracts for same underlying exposure.
Who it affects
All scheduled commercial banks (excluding RRBs and LABs), All India term-lending and refinancing institutions, Bank clients with derivative hedging contracts
Does partial termination of a derivative contract always avoid restructuring treatment?
Yes, if only the notional exposure is reduced and all other parameters of the original contract remain unchanged, it is not treated as restructuring.
What happens if a client misses an instalment payment for crystallized MTM?
If the amount is overdue for 90 days from the due date of that instalment, the entire receivable must be classified as NPA and the MTM reversed from P&L.
Can a client re-hedge the same exposure after termination?
Yes, but only after fully repaying all outstanding instalments of the crystallized MTM from the terminated contract, and subject to extant RBI guidelines on re-booking.