If at all banks face a potential loss or take hit on earnings before interest and depreciation (EBID) for more than 15 per cent but less than 30 per cent, it will be mandatory for lenders to increase provisioning by 20 basis points, said the apex bank
The Reserve Bank of India made strict changes in the rules for unhedged foreign currency exposures of companies where banks have lent to raise capital and fulfil provisioning requirements on 11 October.
Unstable exchange rate may result in loss for companies which did not cover their currency risk against offshore payables. As a consequence, this in turn will decrease their ability to repay bank loans.
Normally, all the companies cover their risk of currency against their overseas payables via currency derivatives market.
The RBI in an explanation through a circular said, “Banks shall consider the items maturing or having cash flows over the period of next five years.” Derivative transactions have been excluded from Unhedged Foreign Currency Exposure (UFCE) rules. And now this exemption has been extended to factoring transactions a part of it.
The incremental capital requirement for exposures which fell in last bucket was recorded as 25 per cent hike in risk weight. The incremental provisioning requirement is in the bracket of 20-80 basis points.
If at all banks face a potential loss or take hit on earnings before interest and depreciation (EBID) for more than 15 per cent but less than 30 per cent, it will be mandatory for lenders to increase provisioning by 20 basis points, said the apex bank.
To derive at entities’ foreign currency exposure, their all sources of borrowings which includes foreign currency borrowings and External Commercial Borrowings must be taken into consideration. This would result in pinching their ability to repay offshore loans.
Entities which refrain from hedging their foreign currency exposures, may incur significant losses during the period of sharp volatility in foreign currency exchange rates, according to the RBI.
“For the purpose of assessing the effectiveness of hedge, guidance may be taken from the applicable accounting standards and the relevant guidance notes of the Institute of Chartered Accountants of India on the matter,” said the RBI.