Forex Exposure of Indian Corporate - RBI ask Banks to monitor it strictly

RBI has warned all commercial Banks to monitor the FX exposure of all its clients whom it has given Fund/ Non Fund Based credit line. In fact this guideline is in place since long time but Banks has not followed it sincerely. RBI has issued a fresh Notice on 2^nd February 2012 to all Banks. Unhedged forex exposure of corporate is a source of risk to corporate and a source of credit risk to financing banks. If the unhedged position is large, it can have serious consequences for the solvency of corporate in the event of large depreciation of the home currency and can result in large credit losses to the financing banks. Considering that a significant part of corporate’ foreign currency commitments tended to remain unhedged, banks were mandated in October 2001 to monitor and review on a monthly basis the unhedged portion of the foreign currency exposures of large corporate whose total foreign currency exposure was relatively large (say, above US $25 million or its equivalent). Banks were further advised in December 2003 to put in place a policy that explicitly recognized and took into account risks arising on account of unhedged foreign exchange exposures of their clients. Banks were also advised that foreign currency loans above US $10 million, or such lower limits as may be deemed appropriate vis-a-vis the banks’ portfolios of such exposures, could be extended by banks only on the basis of a well laid out policy of their Boards with regard to hedging of such foreign currency loans. These instructions to banks were reiterated in December 2008. Further, banks were advised in December 2008 to exchange information among themselves in respect of borrowers enjoying credit facilities from more than one bank, which should, inter alia, cover information relating to derivative transactions and unhedged foreign currency exposures of the borrowers.. Recent events relating to derivative trades showed that excessive risk taking by corporate could lead to severe distress to them and large potential credit loss to their bankers in the event of sharp adverse movements in currencies. While extending fund based and non-fund based credit facilities to corporates, banks should rigorously evaluate the risks arising out of unhedged foreign currency exposure of the corporates and price them in the credit risk premium. Banks may also consider stipulating a limit on unhedged position of corporates on the basis of their Board’s approved policy.