RBI Proposes Stricter Capital Rules for Banks on Forex and Gold
The Reserve Bank of India has put forward new draft regulations to tighten capital requirements for banks. These rules target exposure to volatility in foreign exchange and bullion markets. The central bank wants to impose a higher capital charge on open positions.
Key Changes in the Draft Regulations
Under the proposed rules, commercial banks must maintain a capital charge of 9% on their net open positions in foreign exchange and gold. This requirement will take effect from April 1, 2027. The RBI stated that this move aims to align domestic banking regulations with global standards. It also seeks to discourage excessive risk-taking in currency and gold markets.
The draft introduces a flat "safety buffer" for banks. They will need to hold capital equal to 9% of their overall net open position. This is an additional requirement on top of existing capital charges for credit and interest rate risks linked to these assets. The RBI explained that this step consolidates the methodology for measuring such risks within the capital adequacy framework. It replaces previous rules that were spread across multiple directions.
Impact on Banks and Businesses
The new norms are designed to strengthen bank stability. However, they could lead to slightly higher costs for businesses. Loan, hedging, and remittance costs might see a marginal increase. To standardise risk measurement, the RBI has prescribed a simplified "shorthand method".
Banks will be required to calculate net long and net short positions for each currency. The total open position will be defined as the higher of the absolute net long or net short positions across all currencies. This figure will then be added to the net position in gold.
For example, if a bank has a net long position of Rs 300 crore in currencies and a net gold position of Rs 35 crore, its total exposure would be Rs 335 crore. At the 9% charge, this would require capital of around Rs 30.2 crore.
Treatment of Gold Exposures
According to the draft, gold exposures will be treated in the same manner as foreign currency positions. A bank's net position in gold, whether spot or forward, will be added to its foreign exchange exposure when calculating total risk. The RBI emphasised that banks must hold capital against gold holdings with the same rigour applied to volatile foreign currencies like the dollar and the euro.
Operational Flexibility for Banks
The draft also provides operational flexibility to banks. They will be allowed to determine their own "end of business day" for computing open positions. This decision must be based on board-approved internal policies.
Transactions undertaken after the cut-off can be rolled over and reflected in the next day's positions. The RBI said this move would help banks manage time-zone differences and late-hour trades more efficiently.
The draft regulations are now open for public comment. The RBI is seeking feedback before finalising the rules. This initiative is part of broader efforts to enhance the resilience of India's banking sector against market fluctuations.
