RBI asks corporates to safeguard against external shocks

The Reserve Bank of India (RBI) Deputy Governor Harun Rashid Khan on Tuesday said that corporates must safeguard themselves from external shocks especially from the volatility arising out of fluctuations in the value of currencies while highlighting the need for “responsible use of credit”.

“One challenge that some corporates might face, going ahead, is in terms of raising resources — not because of non-availability of resources, nor for lack of creditworthy business opportunities but because of how the debtors respect their commitments as also an evolving thinking on ‘efficiency imperative’ in credit dispensation,” said Mr. Khan while addressing CII National Risk Summit here on “De-risking the Future of India Inc.”

It is very likely that the days ahead will experience enhanced scrutiny of credit decisions of banks by depositors and tax payers, besides shareholders. “Is it all because of the deteriorating credit culture? We need to examine,” he added.

Mr. Khan said that going ahead, non-financial companies may think of some kind of stress tests to assess their resilience to emerging risks, similar to the approach adopted by financial sector industry, subsequent to the global financial crisis (GFC).

Further he said that large scale un-hedged foreign currency exposures are not only a threat for individual entities but also a concern to the economic and financial system stability.

While regulators certainly will not like to micro manage what otherwise is a commercial decision, corporates need to take care of the potential risks embedded in their un-hedged currency exposures since they might incur significant costs due to unexpected and sudden exchange rate movements, Mr. Khan added.

Forex reserves

According to the Deputy Governor, India do have comfortable foreign exchange reserves. However, he said that there is a strong view that no amount of such reserves can cushion extreme external shocks.

“That too here we are talking about nations. You can imagine how vulnerable corporates can become if they have too much of foreign currency exposures.”

People in business should realise that adoption of risk management strategies is not meant for generating additional earnings but is needed for protection of the projected income flows.

Further he said that “for countries like ours we need to reassure that technologies would ultimately improve job opportunities by augmenting inclusive growth - both quantitatively and qualitatively - rather than taking them away and that they enhance the standard of living rather than destroy it.”

While cautioning the businesses, Mr. Khan said that India is on the cusp of a great upsurge and business entities must ride the wave but they should be mindful of the risks that they are assuming for themselves and for the system as a whole.

He also said that the macro-economic vulnerabilities facing our economy have significantly receded, thanks to improvement in growth outlook, fall in inflation, sharp reduction in oil prices, recovery in the external sector coupled with a bigger war chest of forex reserves, and a strong commitment from the Government to contain fiscal deficit.

Better position

“This implies we are much better positioned among our peer countries to cope with future uncertainties and vulnerabilities.” Having said that, “we can not afford to be complacent and that is why we want to be cautious in our approach and want to be more certain than everyone else that our economy and financial system do not have to repeatedly face many of these vulnerabilities,” he added.

Mr. Khan also said that India can not afford to lose the greatest opportunity that it possibly got over the last so many years, given its relatively strong position amongst emerging market economies. On the other hand, with a political set up so attuned to the concerns of the industry, the ‘Make in India’ perspective offers a paradigm shift in terms of Government-industry interaction.

Deepak Parekh, Chairman, HDFC said “There are a number of risks that banks and financial institutions have to constantly manage like credit, interest, forex, maturity risks, but by far the most important risk is reputational risk. If you lose it, it's nearly impossible to get it back again. Senior management must instil and crusade a culture of integrity, honesty and transparency -which is a foundation for a robust risk management framework.” 

It is very likely that the days ahead will experience enhanced scrutiny of credit decisions of banks by depositors and tax payers, besides shareholders.

Recommended for you