Mumbai, Jun 24: The Reserve Bank on Wednesday aligned the computation of capital charge for foreign exchange risk of banks with international standards.
Banks would compute Net Open Position and maintain capital charge for foreign exchange risk at both group or consolidated level and solo or standalone level, RBI said in a notification.
Besides, banks would meet the capital requirements for foreign exchange risk on a continuous basis, that is, at the close of each business day, it said.
"Upon a review and to ensure greater alignment with international standards and consistent implementation across commercial banks, there is a felt need to amend these instructions," it said.
The central bank has proposed that the directions come into effect from April 1, 2027.
With regard to exclusion, the RBI said, commercial banks will not have to apply foreign exchange risk capital requirement to any position that is deducted from the bank's regulatory capital, including a position that is hedging such a position.
Holdings of capital instruments that are deducted from a commercial bank's capital or risk weighted at 1,250 per cent are not required to be included in the forex risk capital requirements, it said.
"A bank shall not apply foreign exchange risk capital requirements to securities which are already matured and remain unpaid, or have been classified as a non-performing asset/investment. Such securities shall attract capital only for credit risk," it said.
It further said that a bank would have the option to exclude certain structural foreign currency investments from the calculation of Net Open Position, on both a standalone and a consolidated basis.
The exclusion is limited to the amount that neutralises the sensitivity of the capital ratio to movements in exchange rates, and the exclusion from the calculation is made for at least six months, it said.
The notification said a matched currency risk position will protect a bank against loss from movements in exchange rates, but will not necessarily protect its capital adequacy ratio.
If a bank has its capital denominated in its domestic currency and has a portfolio of foreign currency assets and liabilities that is completely matched, its capital/asset ratio will fall if the domestic currency depreciates, it said.
By running a short risk position in the domestic currency, the bank can protect its capital adequacy ratio, although it would result in a loss in the event of appreciation of the domestic currency, it added.
RBI has also illustrated various case scenarios for the computation of the Capital Adequacy Ratio.
"The objective of these Amendment Directions is to ensure greater alignment with the Basel Committee on Banking Supervision (BCBS) standards and consistent implementation of instructions across REs (Regulated Entities)," it said.
Currently, a small finance bank is not required to calculate and maintain a capital charge for foreign exchange risk. However, a small finance bank which is operating as an Authorised Dealer Category I bank will be required to monitor its net open position, it said.
It further said that the risk weights on net open position would be applicable only to those regional rural banks which are Authorised Dealers.
Other regional rural banks may calculate the risk weights on net open position by considering only the net open position from gold, it added.
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