The Reserve Bank of India (RBI) on Thursday advised banks to create awareness among their borrowers for hedging agricultural commodity price risk. “Banks should encourage hedging by the agri-borrowers by creating awareness amongst them regarding the utility and benefits of hedging through agri-commodity derivatives,” RBI said in a notification to all banks. “This would help to develop strong risk management capabilities to manage agri-commodity price risk,” it added.
At the same time, said RBI, “banks must keep the sophistication, understanding, scale of operation and requirements of their agri-borrowers in mind while advising on the availability and use of these instruments.”
To begin with, banks were asked to encourage large agricultural borrowers such as agricultural commodity processors, traders, millers and aggregators to hedge their commodity price risk.
“The hedging can be through agri-commodity derivative products available on recognised exchanges in India,” the RBI said. Banks were also advised to educate customers about the suitability and appropriateness of using these products for hedging specific exposures so that these customers can take an informed decision, lessening the scope for mis-selling of these derivatives. Presently, hedging tools including derivatives are available in the Indian market, but these are not being used extensively. due to lack of awareness of the products or their inherent complexity.
