MUMBAI, November 17: The ceiling on external commercial borrowings is unlikely to be lifted even after the phased liberalisation of the capital account over a period of three years.

Delivering the keynote address on "Foreign Exchange Risk Management: The Challenges Ahead" at the Narsee Monjee Institute of Management Studies in Mumbai, the capital account convertibility panel chairman S S Tarapore said that there would be a significant increase in the corporate sector's foreign exchange exposures with the opening up of the Indian economy and this will ultimately devolve on to banks and other non-bank financial intermediaries.

``Currency risks, interest rate risks and asset-liability mismatches are not easily appreciated by the corporate sector as also by financial intermediaries and it is here that there is a potential problem area,'' said the former deputy governor of the Reserve Bank of India.

Tarapore said that under a liberalised capital account, corporates would have a much larger portfolio choice in controlling their liabilities and assets in terms of instruments, currencies and maturities and quite often the risks are not properly evaluated.

Though it would appear very attractive for corporates to undertake borrowings in yen and leave the exchange rate position open and make a killing as the yen depreciates against the dollar, a see-saw effect on the yen-dollar rate could drive a corporate to virtual bankruptcy.

Tarapore warned that corporates, as a part of prudent management must cover their risks. He added that it was unfortunate that respected analysts and foreign exchange dealers often advise corporate clients to take positions in the forex market.

``While corporates have sometimes reported huge gains by taking positions in the forex markets, the more frequent story is of the best of corporates having their balance sheets ruined by speculative positions in the forex markets which have turned sour,'' Tarapore said.

``It is true that in a world of flexible exchange rates, corporates have to take a view of forex markets," he said. "The strategy for corporates in the forex market should be one of loss minimisation rather than profit maximisation,'' he added.

According to Tarapore, the disclosure of foreign exchange exposures in balance sheets should be made mandatory.

Speaking on the desired levels of capital adequacy ratios of banks, Tarapore said that the traditional notions of capital adequacy will become less useful in determining the safety and soundness of financial organisations.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.