The Reserve Bank on Thursday asked the banks to advise their large agri-borrowers to hedge their commodity price risks through derivative products available on the exchanges.
"Banks may encourage large agricultural borrowers such as agricultural commodity processors, traders, millers, aggregators etc, to hedge their commodity price risks," the central said, adding volatility in agricultural commodity prices is a prominent risk which needs to be addressed.
The advice comes amidst rising threats of an El Nino incident impacting the monsoons for the second successive year this year.
The Met department has already predicted below par monsoons with a long-term average of rains falling short to 92 percent.
It said there is a lack of awareness among the borrowers due to which the available hedging tools are not used by them.
The central bank said hedging of the agri-commodity price risks will be beneficial to both the borrowers as well as banks and, hence, it is desirable that a risk management culture is fostered.
Banks should create awareness amongst the borrowers regarding the utility and benefits of hedging through agri-commodity derivatives, it said adding however, they should keep in mind the sophistication, understanding, scale of operations and requirements of the borrowers while advising on these instruments.
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