Banks to make provision for clients’ risky forex exposure

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Concerned over the impact of unhedged foreign currency exposure of firms on banks, the Reserve Bank of India has asked lenders to make extra provisions for their clients’ unhedged forex exposure.

The central bank on Wednesday announced the final guidelines on incremental provisioning and capital requirements for banks lending to companies with unhedged forex exposure. These will take effect on April 1.

They said banks will have to ascertain the amount of unhedged foreign currency exposure (UFCE), estimate the extent of likely loss and the riskiness of the unhedged exposure and provide for appropriately.

The monitoring of such unhedged exposure needs to be done on a monthly basis and the incremental provisioning and capital needs calculated once a quarter. However, during periods of high rupee volatility, it may be done at monthly intervals.

The guidelines provided some relief to the exporters and services sector players, as they allowed banks to exclude natural hedges available to companies, besides financial hedge, while ascertaining the risks.

“Foreign currency exposure (FCE) refers to the gross sum of all items on the balance sheet that have impact on the profit and loss account due to movement in foreign exchange rates. This may be computed by following the provisions of relevant accounting standard. Items maturing or having cash flows over the period of next five years may only be considered,” RBI said.

Vibha Batra, co-head of financial sector ratings at Icra, said: “The guidelines are comprehensive, as they give benefit to companies with natural hedge and also cover the infrastructure projects under implementation. At the same time, they allow banks to compute losses on the forex liability maturing within a timeframe rather than the overall forex liabilities.”

“For example, if an airline has a forex revenue of $10 million and has liabilities to the extent of $10 million, the net forex exposure could be negligible and, therefore, banks need not provide for unhedged forex exposure. Similarly, infrastructure projects under implementation many not have any Ebidta. The guidelines provide for computing the losses in relation to three years after commencement of operation,” Batra pointed out.

Loss due to fluctuation in the rupee-dollar exchange rate may be calculated using annualised volatilities. The largest annual volatility seen in the rupee-dollar rate in the last 10 years may be taken as the movement in the adverse direction, the guidelines said.

Once the loss figure is calculated, banks may compare it with the annual Ebid (earnings before interest and depreciation) according to the latest quarterly results certified by statutory auditors. The loss may be computed as a percentage of Ebid. “Higher this percentage, higher will be the susceptibility of a company to adverse exchange rate movements. Therefore, all exposures would attract incremental capital and provisioning requirements (over and above the present),” RBI said.

The incremental provisioning requirement on the total credit exposure over and above the extant standard asset provisioning will be 20 basis points in case the likely loss/Ebid is between 15 per cent and 30 per cent. In case the loss is between 30 per cent and 50 per cent, the incremental provisioning will be 40 basis points.

On the same lines, if the loss is between 50 per cent and 70 per cent, the incremental provisioning would be 60 basis points. For Ebid more than 75 per cent, the provisioning would be 80 basis points and the incremental capital requirement would be a 25 per cent increase in the risk weight.

“This category (where Ebid is more than 75 per cent) is most likely to default on account of high unhedged exposure due to volatility in the USD-INR rate. If the account becomes an NPA, the bank has to make provisions accordingly,” RBI said.


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