The Reserve Bank of India on Tuesday introduced incremental provisioning and capital requirements for bank exposures to corporates having unhedged foreign currency exposures.

These measures have been introduced as unhedged foreign currency exposure (UFCE) of corporates is a source of risk to them as well as to the financing banks and the financial system.

Large unhedged forex exposures have resulted in accounts becoming non-performing in some cases.

UFCE refers to the fact that fund/ non-fund based exposure of corporates and banks are not protected against adverse currency movements.

As a prudential measure, the RBI said all exposures (of banks) to these corporates (whether in foreign currency or in Indian rupee) would attract incremental capital and provisioning requirements (i.e., over and above the present requirements).

The incremental provisioning requirement on the total credit exposures will range from 20 basis points for likely loss estimate (estimate of the riskiness of the unhedged position) of more than 15 per cent and up to 30 per cent to 80 basis points for likely loss estimate of more than 70 per cent.

This new provisioning requirement will be over and above extant standard asset provisioning.

The RBI said there will be a 25 per cent increase in the risk weight if the likely loss estimate is more than 75 per cent.

UFCE pertains to total unhedged exposure of the corporate and is not limited to unhedged portion of bank’s exposure to the corporate. The amount UFCE will represent the portion of foreign currency exposure which is not hedged using derivatives.

The RBI said banks may ensure that their policies and procedures for management of credit risk factor their exposure to currency-induced credit risks and are calibrated towards borrowers whose capacity to repay is sensitive to changes in the exchange rate and other market variables.

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