In order to secure Indian banks from the impact of unhedged foreign currency exposure of corporate, the Reserve Bank of India (RBI) has asked the domestic lenders to calculate the incremental provisioning for them to entities with unhedged exposure at least once in a quarter. Meanwhile, the calculation should be done on monthly basis during periods of high US Dollar-INR volatility.
Highlighting that unhedged foreign currency exposures of the entities has become an area of concern not only for an individual entity but also for the entire financial system, the central bank has noted that extent of corporates’ unhedged foreign currency exposures continues to be significant and is increasing the probability of default in times of high currency volatility. Conversely, Reserve Bank also suggested the entities to hedge foreign currency exposure as unhedged exposure can lead to significant losses for them due to exchange rate movements. Corporates’ losses reduce their capacity to service the loans taken from the banking system and thereby affect the health of the banking system.
However, the RBI had earlier also issued norms suggesting banks to closely monitor the unhedged foreign currency exposures of their borrowing clients and also factor this risk into the pricing.