In a newly circulated guidelines, Reserve Bank of India (RBI), India’s banking authority, has instructed all banks to include their derivatives on their respective bank balance sheets. According to the new release, banks are now to consider all of their derivatives at par with their standard assets.

The new instruction is aimed towards making bank’s internal transaction more transparent and auditable at any given time. To comply with the instructions, bank may face little trouble initially, but in long run, they will come out stronger, observes a market analyst. To abide by the new RBI rule, all overdue receivables now-onwards will be placed in the derivatives positions in the similar way of treating non-performing assets. The derivatives norms will also ensure having with increased off-balance sheet exposures.

“The investments of a bank in the equity as well as non-equity capital instruments issued by a subsidiary, which are reckoned towards its regulatory capital, according to norms prescribed by the respective regulator, should be deducted at 50 per cent each, from Tier I and Tier II capital of the parent bank, while assessing the capital adequacy of the bank on ‘solo’ basis, under the Basel I framework,” said the draft guidelines released by RBI recently. However, for the non-banking financial subsidiaries, practices of the respective regulators will decide about their investments.

According to the new circular, Banks are now to organize more capital if they have subsidiaries or associates, said a financial expert adding that the subsidiaries or associates are also to encounter added financial hardships if they want to engage with the parent bank in terms of investing in their equity or debt capital instruments.