Firms in a fix over currency options

Companies hit by the sudden appreciation of foreign currencies such as Swiss franc and yen are finding it difficult to restructure their currency options as banks have become cautious in extending fresh credit limits to them.

According to bankers, while there are basket swaps for restructuring existing foreign currency option deals, extending fresh credit exposure to companies has become an issue.

Basket swap is a structure where the dollar liabilities could be converted into a basket of currencies, rather than a single currency, thereby resulting in risk diversification. The popular structures are Asian basket, G3 basket and G-10 basket of currencies.

Most foreign banks have sold currency structures to new generation private sector banks, who in turn have sold them to their corporate clients, said a banker.

Derivatives deals require double or triple the credit limits compared with normal credit-related transactions. Therefore, a majority of the companies have exhausted the limits for derivative transactions and hence need fresh limits.

Many companies have made representations to the RBI complaining against banks for selling them exotic derivative products. But, according to bankers, the RBI should have laid down the guidelines on foreign exchange derivatives along with the rupee derivatives.

"The RBI has allowed companies to sell options rather than merely buying them for the purpose of hedging. This gives the impression that companies adhere to adequate risk management practices. The companies should thus not bother about mis-selling such products as they enjoyed the returns when the currency movements were favourable. Periodic data on the products is furnished to the RBI as well," said a banker.

Industry sources said that losses on foreign exchange deals are being exaggerated to camouflage other business losses arising out of a slowdown in credit, rupee appreciation and weakness in global markets ahead of the third quarter results.

Moreover, the RBI has allowed companies to cancel and rebook forward contracts on the basis of expected turnover. This would help the companies to fudge their turnover when approaching banks for additional derivatives limits.

While, in its draft guidelines on rupee derivatives, the RBI had empowered banks to seek a complete disclosure of the credit limits enjoyed by companies, it softened its stance in the final note.