RBI asks banks to review forex exposure

QUARTERLY REVIEW OF MONETARY POLICY

Rising foreign currency exposure of banks have raised eyebrows at the Reserve Bank of India (RBI).

The banking regulator in its review of the annual policy today directed banks to review large foreign currency exposures and put in place a system for monitoring unhedged exposures on a regular basis so as to minimise the risks of instability in the financial system under the current highly uncertain conditions.

The commercial borrowings of the country, which includes loans, securitised borrowings such as foreign currency convertible debentures by commercial banks among others, stood at Rs 1,96,903 crore as on June 2007.

Banks will also have to put in place internal limits as deemed appropriate for foreign currency loans on the basis of a well laid out policy approved by banks' boards.

The regulator has also asked banks to carefully monitor corporate activity in terms of treasury and trading activity and sources of other income to the extent that embedded credit or market risks pose potential impairment to the quality of banks' assets.

A Parulekar, executive director, Bank of India, said, "Banks could face risks on their corporate foreign exposure in two areas, one, on the rupee credit extended to corporates for investment in overseas subsidiaries. Many corporates have borrowed in rupees for investment in overseas joint ventures and wholly-owned subsidiaries. While transfering money out of India for investment it is done in international currency. In the process, banks are indirectly exposed to the exchange rate risk of the corporate."

"Banks have also issued credit-linked notes, as a comfort provided to assure payment, to overseas investors of FCCBs. The conversion into equity shares happens at a particular strike price. With the present upheaval in the stock market, the market prices in some cases may be less than the strike price. In this circumstance, there is no incentive for the investor to convert bonds into equity shares. This increases the responsibility of the corporate to pay interest. In case, the corporate has not planned for it (interest payment) in the cash flow, the payment onus may fall on the banks. This payment is in international currency," added Parulekar.

"The RBI's comment is a prudent advisory that comes under the backdrop of global events. The regulator is asking banks to be more prudent. The RBI has clear policies in place when it comes to foreign exchange inflows and outflows. Banks comply with them," said Neeraj Swaroop, chief executive officer, Standard Chartered Bank, India.

A M Naik, chairman, L & T said, "Mega projects will be hit if foreign currency loans are restricted since corporates go for such loans as the cost of borrowing is high in the country and financial viability is crucial in such projects.''