What changed
RBI now mandates banks to rigorously evaluate unhedged foreign currency exposure risks of corporates and price them into the credit risk premium. Banks may also set Board-approved limits on unhedged positions. Earlier circulars only required monitoring and reporting for exposures above $25 million.
What it means for you
Banks must integrate forex risk assessment into credit pricing, potentially increasing loan costs for corporates with large unhedged exposures. This shifts focus from mere monitoring to active risk mitigation, reducing potential credit losses from sharp currency movements. Lenders need to update credit policies and pricing models accordingly.
What you must do
- Update credit risk assessment frameworks to include rigorous evaluation of unhedged forex exposure for all fund and non-fund based facilities.
- Adjust credit risk premium pricing to reflect unhedged forex exposure levels of corporate borrowers.
- Consider setting Board-approved limits on unhedged positions for corporates based on risk appetite.
- Ensure information sharing on unhedged exposures and derivative transactions among consortium or multiple banking arrangement members.
Who it affects
All scheduled commercial banks (excluding RRBs), Corporate borrowers with foreign currency exposure, SMEs with unhedged forex exposure, Banks' credit risk and treasury departments
What is the key change from earlier circulars?
Earlier circulars required monitoring and reporting of unhedged forex exposure above $25 million. Now, banks must rigorously evaluate these risks and price them into the credit risk premium, with possible Board-approved limits on unhedged positions.
Does this apply to SMEs?
Yes, the circular reiterates that Board policy should cover unhedged forex exposure of all clients, including SMEs, as per the December 2008 circular.
How should banks handle consortium arrangements?
The consortium leader or bank with the largest exposure must take the lead in monitoring unhedged forex exposure. Banks must also share information on derivative transactions and unhedged exposures among themselves.