Forex risk management practices among the corporates are short-sighted with hedging horizon generally being less than three years, a first comprehensive survey that was released by Ernst & Young on Thursday said.
Titled ?Corporate Treasury Survey in India?, the findings further reveal that corporate hedgings were largely within a 12-month band with 33% resorting to ?opportunistic? hedging. While forwards and currency swaps are still the most commonly used instruments, as many as 44% of the corporates have growing exposures to exotic structures.
Says Hemal Shah, associate director, financial risk services at E&Y: ?There is an urgent need for a demonstrable and clear relationship between hedges and underlying exposures to enhance transparency in forex operations. Lack of appropriate recognition of forex exposures further derails the forex risk management strategy. While businesses are still focused on protecting accounting profit and loss, use of hedging as a tool to protect real business cash flows is rarely assessed.?
While companies acknowledge the importance of treasury in serving business units, few have made efforts to assess the real value added by the corporate treasury function. More than 85% of the corporate treasurers still consider treasury as a cost centre. This also reflects in the headcount of personnel handling the treasury function as 61% of the companies have less than five persons deployed in treasury operations.
Commodity price risk management, except in the petroleum and non-ferrous metal space, is still considered as a nascent stage. The need to tap hedging as a margin protection tool has not yet been felt by end-consumers. Commodity price risk management strategy is also short-sighted with hedge horizon limited to one year, in the case of 20% of the organisations. Others have no hedge horizon defined.
With regard to debt management, the survey finds that borrowing decisions are driven primarily by interest rates and liquidity needs. Only 17% of the respondents undertook portfolio analysis and 12% undertook debt sustainability analysis. With the uncertain interest rate environment and increase in leveraged buyouts, it is important for companies to put in place sustainable models for enhancing and optimising the life of the debt portfolio.
Though transaction volumes have increased manifold, automation to back treasury operations has not kept pace. Only 3% of the respondents had implemented an integrated treasury system. Most corporate tresuerers, (59%) use spreadsheets.