RBI wants more provisions for unhedged forex exposure

* Move underscores probability of defaults as currency stays volatile

Written by ENS Economic Bureau | Mumbai | Published: July 3, 2013 12:58 am

The Reserve Bank of India (RBI) has proposed to impose incremental provisioning and capital requirements for bank exposures to corporates having unhedged foreign currency exposures.

The RBI has resorted to this measure as the extent of unhedged foreign currency exposures of the corporates continue to be significant and increase the probability of default in an environment of high currency volatility.

For likely loss of 15-30 per cent,the incremental provisioning over and above the existing standard provisioning will be 20 basis points; for loss of 30-50 per cent,it will be 40 bps; for loss of 50-75 per cent,the provisioning will be 60 bps and above 75 per cent,it will be 80 bps.

There’s no provisioning for loss up to 15 per cent. Besides,for a loss of 75 per cent and above,there’s a 25 per cent increase in risk weight,the Reserve Bank said in its draft guidelines.

The RBI had,in October 2012,admitted that as much as 65 per cent of forex loans and bonds of Indian companies was unhedged,highlighting the extent to which Indian corporates are vulnerable to currency risks at a time when currencies across the world,including the rupee,are volatile.

RBI deputy governor HR Khan had then pointed out that the large unhedged forex exposure,together with excessive leverage that companies had indulged in,had resulted in the huge corporate debt restructuring seen recently.

For calculating the incremental provisioning and capital requirements,the RBI has prescribed a methodology in its draft guidelines.

As per the guidelines,banks should 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.

Risk factor

* For likely loss of 15-30%,the incremental provisioning will be 20 bps: for loss of 30-50%,it will be 40 bps

* For loss of 50-75%,the provisioning will be 60 bps and above 75%,it will be 80 bps

* For a loss of 75% and above,there’s a 25% increase in risk weight for banks

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