Calculating corporates' unhedged exposure a tall task: SBI

The Reserve Bank of India (RBI) has proposed incremental provisions and capital requirements on banks, which lend to corporates having unhedged foreign currency exposures.

Also Read: RBI cracks down on forex speculative trading: Sources
In the wake of increased exchange rate volatility, some Indian companies are likely to incur losses due to their un-hedged foreign currency exposures. These steps are expected to help banks deal with the probability of defaults in an environment of high currency volatility.
However, speaking to CNBC-TV18, Diwakar Gupta, MD & CFO of the country's largest lender State Bank of India says the biggest problem will be calculation of corporates' un-hedged exposure.
He says volatility of the rupee over the last decade on an annual basis will determine the likely losses, after which the likely loss for the corporate on its whole balance sheet has to be compared with the earnings before interest and depreciation (EBID).
"A simpler calculation would have been much more in order. Let us say: Rs 2 per dollar on the dollar un-hedged position rather than going into this grid of the overall balance sheet exposure, comparison to EBID and then a 15-30-50 or 75 percent. We need a much simpler dispensation; otherwise it is really going to be expensive, inaccurate, tedious and time consuming," he says.
Gupta says more capital will be needed to be set aside, if it is 75 percent or more of the likely loss percentage over EBID, which may lead to higher pricing. "In the other event, if the provisioning is not very large, I do not think we need to re-price. We will just factor it into our results and show a slightly lower profit doing this as a one-time," he says. Below is an edited transcript of Gupta's exclusive interview on CNBC-TV18. Q: The Reserve Bank of India (RBI) issued draft rules yesterday, that unhedged FX exposures of your clients will mean a punishment for you in terms of higher provisioning. Do you even have a rough idea of how many clients have un-hedged exposure where the loss can be over 75 percent of your EBID? Any idea how much provisioning might go up by at your end?
A: The biggest problem here is going to be: how the calculations will be made. The guidelines came out yesterday night and we have not gone through the fine print. There are two or three things, which stand out. Firstly, the entire un-hedged position of the corporate across banks has to be ascertained.
Secondly, volatility of the rupee over the last 10 years on an annual basis will determine what could be the likely loss and then the likely loss for the corporate on its whole balance sheet has to be compared with the earnings before interest and depreciation (EBID).
It is a very tough calculation to make. In real time, it will be very well near impossible. We do not have any idea today of the amount of additional provisioning that we may need to make. We have totally about USD 10 billion across foreign currency (non resident) bank accounts (FCNB), export bills rediscounting (EBR), preshipment credit in foreign currency (PCFC) and external commercial borrowings (ECB). Some of it is with the natural hedge; some of it is with a formal hedge and some of it is unhedged because it is our large corporates like the Tatas or the Reliance and all.
The other thing is that the additional provision is on the entire banking exposure, not just on the FX exposure. It will take a while to get to know exactly what the quantum is. A simpler calculation would have been much more in order. Let us say: Rs 2/dollar on the dollar unhedged position rather than going into this grid of the overall balance sheet exposure, comparison to EBID and then a 15-30-50 or 75 percent. We need a much simpler dispensation; otherwise it is really going to be expensive, inaccurate, tedious and time consuming. Q: Do you also expect this to make loans expensive? There are further rules that you have to give your data to the credit rating agencies, as well as, you will have to work it into your internal rating of those companies. And if you find them exposed, your loans to them will also accordingly become expensive. Generally, do you think loans become expensive either across the board or to those guys who have FX loan exposures?
A: To the extent that more capital will need to be set aside, which is the case if it is 75 percent or more of the likely loss percentage over EBID, then to the extent you need to allocate more capital, certainly the pricing itself goes up. In the other event, if the provisioning is not very large, I do not think we need to re-price all loans. We will just factor it into our results and show a slightly lower profit doing this as a one-time.
_PAGEBREAK_ Q: You indicated that the calculation is fairly tedious. What is the recommendation you will give the RBI? These are just draft guidelines, so perhaps there is some scope for it to change. Apart from your recommendation to the RBI, do you see them sufficient or perhaps onerous?
A: We will need to get into the fine print. We will need to see this much more carefully. I should not give a knee-jerk prescription because I cannot really claim I know everything that has been put out in the guidelines very well.
Certainly, something which lends itself to ease of operational administrative is what is required. Therefore, I would say if somebody has a million dollar exposure, and we are expecting Rs 2 volatility, we should accordingly provide million dollars into Rs 2. That is the kind of thing: about Rs 2 crore on that. That is the simpler way of setting aside a provision rather than going across.
For large corporates, you could have 10-12-20 bankers and you will have an auditor, which is what the guidelines say. An auditor will have to compile this. This will happen three months down the line. How do you do it in real time or near real time? Q: The understanding is that these steps are expected to help banks deal with the probability of default in an environment of high currency volatility. Do you foresee in the near-term or perhaps medium-term any kind of defaults on account of the volatility that we have already seen over the past one month?
A: I do not think that these guidelines per se are going to make the process of protected banks portfolios any better. That is done in the original case by insisting on a hedge or consciously waving the hedge. Q: Aside from this provisioning, now that we know that rupee has suddenly gone for a nosedive and it is 10 percent more expensive, dollars have become 10 percent more expensive. Doesn’t it expose a lot of corporates to various kinds of unexpected problems? So, is the non-performing loan (NPL) issue getting a little stickier? If you expected it to have receded in this quarter or next quarter, now will you push that date to two-three quarters further down the line?
A: That is absolutely right. How it works is like this: as a bank, we do not run a risk because we are actually pretty much hedged completely. Nearly every borrower, whether he is an exporter or an importer, is likely to be adversely hit by this volatility.
For an importer, he will have an opportunity loss. He today does not know whether to book a forward sell at a particular rate because he may end up losing in doing that. For an exporter, the buyer is going to push his dollar price down by saying: "you have a greater margin".
So it is only through one cycle that he can benefit from the depreciation and then his dollar price will adjust to the new reality. And that will come to hit him if the rupee were to recover again because then thebuyer is not going to again increase the dollar price. He has other options across the world.
In both cases, it does hit the corporates very badly. The impact of it remains to be seen but it cannot be good. The impact has to be of additional stress. Q: The one number that RBI gave us on May 3, when this issue came up in the monetary policy statement, it said that 60 percent corporate loans were unhedged as of that day. If you took 2011 to be the year of big volatility for the rupee, in the last 10 years, that was about 15 percent. If you just took this thumb rule, will that give you any number at all in terms of how much your credit cost might rise or I am giving you inadequate data?
A: We need some more clarification. Technically, everything is un-hedged. A natural hedge is not a hedge. What is a natural hedge? The point is that I have a natural hedge, but I do not know how much I will get when I get that dollar in—whether I will get 56 or 58 or 61.
I have exported in dollars and I get back dollars after three months; will I get 58 for the dollar or will I get 61 for the dollar? I do not know until I have made a transaction to cover that today. Q: Habitually, you do not cover your exposure? Would it be a large gaping hole?
A: No, not at all. For our bank I can say that more than 80 percent of it is covered. Q: You will expect about 80 percent of the loans you give to have hedge. But here the case is that you have given a loan to Bharti, but they have taken an FX loan from some other person that is unhedged and you have to take cognizance of that. Do you do that now?
A: I should not hazard a guess on this. We need to examine this a little more in detail because if I had given a rupee exposure how will I take into account dollar loans the corporate has taken. That is for the other banker to do; not for me. Q: The 60-day time limit given under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) for Kingfisher ended yesterday. Will there be any steps that will be taken immediately to sell off any of the assets? Have you all gauged what is the personal guarantee given by Vijay Mallya himself?
A: I do not have ball-by-ball, but the fact is that bankers are now liquidating securities and recovering dues, so logically whatever needs to follow as consequential action will follow. Personal guarantees if they have to be invoked, that is the route that will be taken. A suit will have to be filed for that. Q: What is the situation on the ground in terms of credit offtake? Are things looking bleaker than they looked in the previous season same time?
A: No, definitely not. We are today at the same level of credit as in March. We were actually significantly lower than March until the middle of June. So today we are more or less square. We are at the same level.
Having said that, we are actually ahead of the market as we have gained market share.
Last year, at the same time we were about Rs 25,000 crore up over March 2012. So obviously credit offtake has been sluggish and we do not expect that to change very drastically unless there is something very major happening to give a fillip to the economy.