The Reserve Bank of India has asked commercial banks to assess foreign currency exposures of all counterparties that they have exposure to on an annual basis to strengthen systemic stability against forex volatility.
The rules will also require banks to assess unhedged foreign currency exposures of entities and make adequate provisions, according to directions issued by the central bank on Oct. 11. The rules come into effect from Jan. 1, 2023.
“Banks shall determine the potential loss to an entity from UFCE using the largest annual volatility in the USD-INR exchange rates during the last ten years,” the directions read.
For a potential loss to EBID (earning before interest and depreciation) percentage of between 15 to 30%, the directions impose an incremental provisioning requirement of 20 basis points. This provisioning requirement rises with the potential loss to EBID:
30 to 50%: 40 basis points
50 to 75%: 60 basis points
Above 75%: 80 basis points
Banks will also be required to calculate the incremental provisioning and capital requirements at a minimum on a quarterly basis.
Sovereign exposure, exposure to banks and individuals, non-performing assets, and intra-group foreign currency exposures of multinational companies incorporated outside India would be exempt from the calculations, according to the directions.
“Entities which do not hedge their foreign currency exposures can incur significant losses during the period of heightened volatility in foreign exchange rates,” the RBI noted in an explanatory note accompanying the directions.
The Indian rupee has seen significant weakness over the last few months, owing to a strong dollar and rising crude oil prices.
BQ Prime had recently reported that avoiding hedging of foreign currency exposures by companies was weighing heavily on their ability to borrow further. On Tuesday, the rupee closed largely unchanged at Rs 82.32 against the greenback.