Banks told to hike cover for loans to firms with unhedged forex exposures
RBI’s move comes as currency risks from unhedged exposures of companies rise on the weakening of the rupee
Mumbai: The Reserve Bank of India (RBI) on Tuesday proposed that banks set aside more money for loans to companies with unhedged foreign currency exposures.
Banks will also be held accountable for evaluating the risk of a borrower, according to the draft guidelines, which are aimed at minimizing the effects of the rupee’s weakening.
RBI gave notice of such a plan in its annual monetary policy announced in May as currency risks from unhedged exposures of companies rose on the weakening of the rupee.
The local currency fell to an all-time low of 60.73 a dollar on 26 June after starting the calendar year at 54.36, a fall of about 10.5%. It has recovered since then and closed Tuesday at 59.67 a dollar.
Currency consultants say many companies have hedged their currency risks because of the recent volatility in the rupee but most of them have not hedged their external commercial borrowings (ECB) on the assumption that their exports will act as a natural hedge.
However, with a drop in exports, these companies are staring at substantial losses as the loan repayment schedule hasn’t changed. Interest on ECB loans is also not hedged, they say.
Irrespective of the amount loaned to the company, a bank has to calculate the firm’s entire unhedged foreign currency exposure in dollar terms.
The bank will then have to calculate the likely loss to the company based on currency volatility. “For this purpose, largest annual volatility seen in the USD-INR rates during the period of last 10 years may be taken as the movement of the USD-INR rate in the adverse direction," the draft guidelines said.
The greater the possible loss to the company, the more money the bank will have to set aside for its loans.
The provision will be over and above the bank’s usual provisions for the company.
If the loss is seen at more than 15% of the company’s post-tax profit, the provision will go up by 20 basis points (bps). One basis point is one-hundredth of a percentage point.
At a 30-50% loss level, the provision will rise by a further 40 bps, while at a 50-75% loss level, it will increase provisions by another 60 bps. If the loss, as computed by the bank, is seen at more than 75% of profit, the provision will rise 80 bps and the loan’s risk weight will go up by 25%, the draft guidelines said.
Starting 1 October, banks will have to monitor unhedged foreign currency exposure of borrowers at monthly intervals.
The draft guidelines advised banks to ensure that their policies and procedures are calibrated towards borrowers whose capacity to repay is sensitive to changes in the exchange rate and other market variables.
“These could include internal limits for these exposures and where these exposures are high, internal targets to reduce their risk from these exposures," the draft guidelines said.
“Banks can reduce their risk either by reducing the exposure to these borrowers or by encouraging these borrowers to reduce their currency mismatches by hedging foreign currency exposures," it said. Comments and feedback on the draft can be given to RBI by 2 August.
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