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Columns - On Mint Street


RBI uneasy over unhedged dollar exposures

P. Devarajan

BANKERS are worried over corporates refusing to hedge their dollar exposures, as under the present regime, the total exposure of any single corporate is hard to quantify, with each enterprise having many banks on their books.

Reports seeping into Mint Street talk of a lack of co-ordination between banks on the details of unhedged dollar exposures and it is doubtful if the RBI has anything on hand beyond gross estimates.

At least one nationalised bank is insisting on corporates adopting hedging as a compulsory practice though one is not sure of others.

In such instances, the corporate reveals the forex position to the extent of loan syndication done by the particular nationalised bank while refusing to part with details with other banks participating in a loan syndication.

It only assures a portion of the forex facility being covered and some bankers think total unhedged exposures could be a bit uncomfortable.

Corporates and banks cannot be forced to share information on grounds of "client confidentiality," with the worst offenders being the Bollywood bankers manning the new private banks.

The said nationalised bank is not prepared for part exposure and demands full cover from its clients on the portion it funds and any exemption is the prerogative of the board of the bank. And more importantly, corporates have taken forex loans under various facilities starting with FCNR (B) loans.

With Libor still low, a forex loan is cheaper than domestic bank funding with the prime lending rate ruling between 10.50 per cent and 11 per cent.

For the present, the rupee is holding strong against the dollar though it is weak against the euro and the pound. No currency remains strong forever and the current trend can be linked to the interest arbitrage facility built into the system, till it was given up recently.

Most of the forex loans seem to be for five years but when the residual period of old loans is factored in, the Indian corporates could be carrying substantial and needless forex risks. Bankers find it hard to appreciate the practice as some of the top corporates have very strong treasuries advising them.

Seemingly, there is one strong corporate whose entire forex position is unhedged, though none is prepared to reveal its identity.

In the last Credit Policy, the RBI had given sufficient notice to banks and corporates when it said, "RBI is not in favour of increasing the unhedged borrowings by corporates, and short-term forex liabilities of banks in order to meet the demand for "borrowed dollars" that is arising from expectations regarding future movements in dollar-rupee exchange rate... . One way expectations of exchange rate or premia may not always be fulfilled."

Bankers are not agreeable to take the word of corporates on "natural hedges" which are nothing but export earnings to match import payments.

Exporters can maintain dollar balances in EEFC accounts. Export earnings at the gross level do not make much sense as exporters have to repay pre- and post-shipment loans and other borrowings.

Seemingly in one case, a bank found the natural hedges of an exporter equalling bank dues.

RBI is holding talks with banks as any currency hit could turn a corporate into an NPA with banks providing for it.

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