Seeks comments from banks by August 2

The Reserve Bank of India, on Tuesday, proposed incremental provisioning and capital requirements for banks’ exposure to corporates, having unhedged forex exposure, a moved aimed at warding-off any possibility of default by them.

The RBI has come out with draft guidelines on capital and provisioning requirements for exposures to corporates having unhedged foreign currency exposure at a time when the rupee is hovering at the 59 level to a dollar, having touched all-time lows against the dollar.

The extent of unhedged foreign currency exposures of corporates continues to be significant and “increases the probability of default” in an environment of high currency volatility, the RBI said.

“It has, therefore, been decided to introduce incremental provisioning and capital requirements for bank exposures to corporates having unhedged foreign currency exposures,” it said. The RBI has sought comments on this from banks by August 2.

The central bank said that unhedged foreign currency exposures of the corporate are ‘an area of concern’ to the entire financial system.

“Corporates, which do not hedge their foreign currency exposures, can incur significant losses due to exchange rate movements. These losses may reduce their capacity to service the loans taken from the banking system and, thereby, affect the health of the banking system,” it said.

The RBI had in past issued guidelines advising banks to closely monitor the unhedged foreign currency exposures of their corporate clients, and also factor this risk into the pricing.

As per the draft, banks will have to collect information on unhedged foreign currency exposure (UFCE) separately from the corporates.

Referring to estimation of the extent of likely loss, the draft says the loss to corporates in case of movement in dollar-rupee exchange rate may be calculated using the annualised volatilities.

It further asked banks to ensure that their policies and procedures for management of credit risk factor their exposure to currency-induced credit risks, and are calibrated towards borrowers whose capacity to repay is sensitive to changes in the exchange rate and other market variables.

The draft also says banks can reduce their risk either by reducing the exposure to these borrowers or by encouraging them to reduce their currency mismatches by hedging foreign currency exposures.

More In: Industry | Business