RBI says banks must make full disclosure

Thursday 29, June, 2006 Banks will have to make full disclosure in their balance sheet on their derivative transactions.

Besides profit and loss arising out of derivative transactions, the disclosure should include the nature of the financial instruments used in such transactions.

The Reserve Bank of India has come out with draft guidelines on derivative and hedge accounting for banks, which, bankers feel will ensure greater uniformity and clarity in such transactions.

"The standardised accounting practices will help market participants and also led to increased activity in the derivative market," said a senior bank official.

The draft guidelines, given in a discussion paper on the subject, suggest how to classify derivatives, how to account for the gains and losses on valuation and income recognition.

At present banks in India are permitted to undertake transactions in interest rate derivatives and foreign exchange derivatives.

New category

The RBI has suggested that all derivatives for 90 days or lesser will be designated by a bank in a new category called "Derivative through profit and loss unless they meet the hedge accounting criteria."

Derivatives longer than 90 days shall be included in another category called "Derivatives though revaluation account."

If the fair value of a derivative, including hedging instruments cannot be reliably measures, it should be included in a new category "Derivative at cost."

About accounting for derivatives, RBI said, "A gain or loss on subsequent measurement of a derivative included under DPL shall be recognised in the profit and loss account."

RBI has asked for feedback on the discussion paper from banks, following which it would issue the final guidelines.

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