RBI issues draft guidelines to hike provns on unhedged cos

Moneycontrol Bureau

The Reserve Bank of India (RBI) proposed to slap incremental provisions and capital requirements on banks, which lend to corporates having unhedged foreign currency exposures. In the wake of increased exchange rate volatility, some Indian companies are likely to incur losses due to their un-hedged foreign currency exposures.

The Indian rupee had slumped to a record high at 60.71 percent against the US dollar. Since May, the local currency depreciated 10 percent against the greenback.

"Unhedged foreign currency exposures of the corporate are an area of concern not only for individual corporates but also to the entire financial system," RBI said in its draft guidelines issued on Tuesday.

"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."

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Generally, banks provide at the rate of 2 percent for performing (or standard) corporate loans. However, banks have to add incremental provisions between 20 and 80 basis points depending on different risk levels attached to those companies with un-hedged foreign currency exposures.

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For example, a bank has to make an extra 20 bps provisioning over and above standard provisions for its credit exposure to a corporate entity with likely loss up to 15 percent. The additional provision will be 40bps in case of likely risk in the range of 15-30 percent.

For a slab of 50-75 percent likely loss, banks need to provide for 60 bps additionally. The maximum incremental provisioning stands at 80 bps for corporates with more than 75 percent likely loss. Here, it will also fetch a 25 percent increase in the risk weight.

The likely loss is a kind of estimation on the default rates. The loss to the corporate in case of movement in USD-INR exchange rate may be calculated using the annualised volatilities. For this purpose, largest annual volatility seen in the USD-INR rates during the period of last ten years may be taken as the movement of the USD-INR rate, the central bank explained.

RBI mandates risk weight for each asset class and banks abide by such norms. Suppose, a bank lends Rs 100 crore to a company in a sector, which requires 100% risk weight. Therefore, the bank has to set aside 100 percent of 9 percent, the minimum capital adequacy ratio, for that loan. That is Rs 9 crore.

"Banks have to monitor the unhedged foreign currency exposure (UFCE) on a monthly interval. Banks should calculate the incremental provisioning and capital requirements at least on a quarterly basis. However, during periods of high USD-INR volatility, the calculations may be done at monthly intervals. This framework may be implemented from October 1, 2013," RBI said.

Earlier, the central bank had mentioned about such provisiong norms in its annual monetary policy in May 2013. Comments against the proposed draft guidelines may be sent to the RBI latest by August 2, 2013.

saikat.das@network18online.com