What changed
RBI observed that despite earlier circulars, banks were not rigorously evaluating unhedged forex exposure risks or building them into credit pricing. This circular reinforces the February 2012 guidelines, emphasizing that such exposures have led to NPAs and must be addressed with proper mechanisms and board-approved limits.
What it means for you
Banks must now treat unhedged forex exposure as a critical credit risk factor and adjust pricing accordingly. Failure to do so could increase NPA risks, especially for corporates with large foreign currency borrowings. The RBI expects banks to proactively monitor and limit these exposures through board-approved policies.
What you must do
- Implement a robust mechanism to evaluate unhedged forex exposure risks for all corporate clients, including SMEs.
- Price these risks into the credit risk premium for fund-based and non-fund-based facilities.
- Set board-approved limits on unhedged positions for corporates.
- Submit compliance/action taken reports to RBI by end-December 2012, with board approval.
- Ensure consortium leader or bank with largest exposure monitors unhedged forex exposure in multiple banking arrangements.
Who it affects
All scheduled commercial banks (excluding RRBs), Corporate clients with foreign currency exposure, SMEs with foreign currency exposure, Banks' credit risk and treasury departments
What is the key risk RBI is addressing with this circular?
RBI is concerned that unhedged foreign currency exposure of corporates poses risk to the corporates, the financing banks, and the financial system, and has led to NPAs in some cases.
What specific action must banks take by end-December 2012?
Banks must obtain board approval and submit a compliance/action taken report to RBI, including to the Department of Banking Supervision, detailing how they are evaluating and pricing unhedged forex risks.
Does this circular apply to all corporate clients or only large ones?
It applies to all clients, including SMEs, as per earlier instructions. Banks must consider exposures from all sources, including foreign currency borrowings and ECBs.