RBI tightens provisioning norms for unhedged forex exposure
Jan 15 2014 , Mumbai
The extent of unhedged foreign currency exposures of the corporates continues to be significant and this can increase the probability of default in times of high currency volatility, RBI said.
"It has, therefore, been decided to introduce incremental provisioning and capital requirements for bank exposures to entities with unhedged foreign currency exposures," the apex bank said in a notification.
Banks should calculate the incremental provisioning and capital requirements at least on a quarterly basis, it said.
"However, during periods of high USD-INR volatility, the calculations may be done at monthly intervals," it added.
While issuing notification, RBI pointed out that unhedged foreign currency exposures of the entities are "an area of concern not only for individual entity but also to the entire financial system."
It said entities which do not hedge their foreign currency exposures can incur significant losses due to exchange rate movements.
These losses may reduce corporates' capacity to service the loans taken from the banking system and thereby affect the health of the banking system, it added.
Earlier, RBI had issued various guidelines advising banks to closely monitor the unhedged foreign currency exposures of their borrowing clients and also factor this risk into the pricing.