Mumbai: The Reserve Bank of India has capped most non-fund based trade finance through various instruments to one year in what is seen as a possible fallout of the Punjab National Bank scam. RBI tightened the guidelines for hedging commodity price risks and freight risks in overseas markets , which will come into effect next financial year, by limiting the tenor of all bank instruments.“Banks can issue standby letters of credit (SBLCs)/guarantees, for a maximum period of one year, in lieu of making a remittance of margin money for commodity hedging transactions. Banks should ensure that these SBLCs/ guarantees are used by their clients for the intended purposes only,” RBI said in a notification.Banks have to ensure that the quantity and the tenor of the hedge is in line with the entity’s exposure and that the requirement to undertake such hedges is necessary in terms of the exposure of the entity.“Structured derivatives may be permitted to eligible entities who are listed on recognised domestic stock exchanges and fully owned subsidiaries thereof or entities whose net worth is higher than `200 crore provided there is no net inflow of premium direct or otherwise, no leveraged products is used, no derivatives involving another derivative as underlying is used and no exotic derivative products is used.”

Source: Economic Times March 13, 2018 03:00 UTC