Reddy wants voluntary disclosure of dervatives risk exposure

Reserve Bank of India (RBI) Governor Y V Reddy today asked companies to voluntarily start making disclosures on their risk exposures to derivatives and foreign exchange.

"The disclosures could be made mandatory through the accounting standards, on which, I understand, ICAI (Institute of Chartered Accountants of India) is working. It would be desirable if the corporates adopt such disclosures voluntarily, sooner than later, in their own as well as the system's  interest," Reddy said at the valedictory session of the Ficci-IBA seminar on  "Global Banking: Paradigm Shift" in Mumbai.

Reddy's observation assumed significance in the context of the rupee losing  ground against the dollar over the last few days. The Indian unit ended at  44.39/40 per dollar today, its lowest level since December 10 last year when it ended at 44.7650/78. It has shed 0.8 per cent during the week on heavy demand for dollars for import payments from defence and oil companies.

While the banks' risk exposures and their risk-management strategy are usually items of public disclosure, there is a corresponding need for corporates, too, to make adequate disclosures regarding their risk exposures, specially to derivatives and foreign exchange.

This would enable the banker to assess the risk profile of the corporate accurately and to evaluate the appropriateness of various financial products on offer, Reddy said.

The RBI governor also urged banks to review their current procedures and processes for pricing of credit, in view of public perception that loans to private sector corporates are under-priced.

"An area of concern, in terms of public perception, is that there is under-pricing of credit risk for private sector corporates, while there could be overpricing of risks in lending to agriculture as well as small and medium enterprises. There is merit in reviewing the current procedures and processes of pricing of credit, perhaps through a well structured segment-wise analysis of costs at various stages of intermediation in the whole credit cycle," he said.

He said corporates need to be well-equipped to identify, measure, manage and control risks in treasury management, especially when they are counter-parties to the treasury transactions of the banks.