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RBI issues draft norms for cos' unhedged forex play

The RBI has sought feedback on this from banks by August 2

July 03, 2013 8:59 IST | India Infoline News Service
The Reserve Bank of India (RBI) on Tuesday came out with the draft guidelines on capital and provisioning requirements for exposures to corporates having unhedged foreign currency exposure. RBI has sought feedback on this from banks by August 2.

The extent of unhedged foreign currency exposures of the corporate continues to be significant and "increases the probability of default" in an environment of high currency volatility, the Reserve Bank said on Tuesday.

"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 central bank said that unhedged foreign currency exposures of the corporate are "an area of concern" not only for individual corporates but also to the entire financial system.
"Corporates who 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.

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 said 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. Banks should also assess their loan pricing policies to ensure that they adequately reflect overall credit risks, it added.

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