The Reserve Bank of India (RBI) has asked banks to actively monitor foreign exchange risks and include them in the credit risk premium charged by them from the borrowing companies. The regulator on Tuesday alerted banks that the volatility in the dollar- rupee pair can lead to solvency issues for banks and companies, owing to unhedged portfolio of companies.
“Companies’ unhedged exposure to foreign currency fluctuations can become a source of great risk. There have been no such instances so far, but we asked banks to monitor this as a preemptive measure,” said Anand Sinha, deputy governor, RBI.
“While extending fund and non-fund-based credit facilities to corporates, banks should rigorously evaluate the risks arising out of unhedged foreign currency exposure and price them in the credit risk premium,” RBI said. If the unhedged position is large, it can have serious consequences on the solvency of corporates in the event of a large depreciation of the home currency, and can result in large credit losses to financing banks, Sinha added.
The central bank has also advised banks to create a cap on the unhedged foreign exchange portfolio of corporates. “Banks may also consider stipulating a limit on the unhedged position of corporates on the basis of their board’s approved policy,” the central bank said.
