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Breather for banks’ unhedged foreign currency exposures

The Reserve Bank of India (RBI) has given banks a breather for additional provisioning for the unhedged foreign currency exposure of their clients in the quarter ending June. Now, banks can spread provisioning for the June quarter equally through this financial year.

RBI, however, clarified no such leeway would be available for capital requirements related to unhedged foreign currency exposures.

Guidelines on unhedged foreign currency exposures became effective from April 1.

In their representations, some banks said as the required provision for the June quarter would be the first computation in this regard, the entire provisioning burden would fall on the earnings of one quarter, RBI said in a statement.

It added banks could ask clients to provide information on unhedged exposures each quarter, on a self-certification basis, preferably audited by internal auditors. However, on an annual basis, clients should furnish information that is audited and certified by statutory auditors.

Foreign currency exposures in currencies other than the dollar may be converted into dollars at current market rates. RBI norms assess the risks of unhedged exposures in the light of volatility in rupee-dollar exchange rates. Inter-bank exposures were excluded from the ambit of the unhedged foreign currency exposure guidelines, RBI said.

The incremental provisioning for such exposures should be based on the exposure amount used for computing standard asset provisioning. Also, incremental capital requirements for these exposures should be based on the exposure amount used to calculate credit risk-capital requirements.

RBI will ask Foreign Exchange Dealers’ Association of India (Fedai) to compute the volatility of the rupee-dollar exchange rate based on RBI’s reference rate.

This would also be used to compute the extent of the likely loss on account of un-hedged foreign currency exposures. Banks had petitioned Fedai be mandated to publish dollar-rupee annual volatility data to ensure consistent annualised volatility was used across the banking sector.

Norms on un-hedged foreign currency exposure mandate the likely loss due to exchange rate movements be compared with the annual earnings before interest and depreciation (Ebid) in the latest quarterly results. However, banks had said such information might not be available in the case of private and unlisted companies. RBI said in case such data was not unavailable every quarter, the latest audited quarterly or annual results should be used. The annual Ebid figure used should at least of the previous financial year.

Considering the challenges in computing provisions for the exposure of smaller clients, RBI said banks could use a standardised method that required incremental provisioning of 10 basis points over and above the extant standard asset provisioning.

Smaller entities are those towards which the banking sector’s overall exposure isn’t more than Rs 25 crore.


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