RBI asks banks to make additional provisions for unhedged forex exposure

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RBI mandated banks to make additional provisions if the estimated loss from unhedged exposure exceeds 15% of the company's earnings. Reuters RBI mandated banks to make additional provisions if the estimated loss from unhedged exposure exceeds 15% of the company's earnings. Reuters
SummaryRBI asked lenders to set aside more provisions for such loans starting from April 2014.

fallen off to levels of 55 and further to levels of 60 in June.

The RBI wants banks to calculate the estimated loss by considering the biggest yearly swing in the dollar/rupee rate over the last 10 years; this method could bump up banks' provisions since between January 2013 and January 2014, the rupee lost 15%.

Banks will have to calculate the incremental provisioning every quarter and during times of stress every month and the adequacy of banks' risk management will be monitored from time to time. The central bank has asked banks to gather details of unhedged forex exposure of every corporate borrower and estimate the impact of the movement of the exchange rate on such exposures. The guidelines say unhedged forex exposure may exclude items that are naturally hedged wherein cash flows arising out of business offset the risk of the exposure.

The final guidelines come six months after the central bank asked for comments on a draft of the norms. The massive fall of the rupee during May-August in 2013 prompted the central bank to instruct banks to monitor unhedged exposure of companies before giving fresh loans. Short-term debt, payable within the year, is the most vulnerable to currency fluctuations. According to government data as of September 2013, short-term debt stood at a whopping $94.8 billion, 34.2% of the country's forex reserves. However, a large part of this is hedged either through natural hedges or derivatives.

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