The Hindu Business Line : Onus on banks to see cos hedge forex loans

While the country's biggest bank, State Bank of India, has always been insisting on a hedging mechanism in case of its foreign currency loans, other leading public sector banks are also understood to be following suit.

Mumbai , Nov. 26

THE Governor of Reserve Bank of India, Dr Y.V. Reddy, had clarified post-credit policy, that the hedging of foreign currency loans is not mandatory.

However, a recent circular from the apex bank to authorised dealers in foreign exchange seems to suggest otherwise.

According to an RBI circular, dated November 14, 2003, "in cases where external commercial borrowings have been raised for meeting rupee expenditure under Automatic Route, the authorised dealer has to ensure at the time of drawdown that the forex exposure of the borrower is hedged unless there is a natural hedge in the form of uncovered foreign exchange receivables.''

Most bankers, it appears, have started reading between the lines and feel that the regulator has made it clear that the responsibility to ensure that corporates duly hedge their foreign currency exposures has now been shifted entirely to the banks.

One senior banker with a leading public sector bank said, "Earlier, it was mandatory for banks to insist on borrowers hedging their foreign currency loans. It is only a recent phenomenon determined largely by market forces, that banks don't insist and allow corporates to take a view based on their outlook on the market".

"The RBI Governor said that hedging is not mandatory for corporates. But the central bank is indirectly nudging banks towards ensuring that borrowers hedge their loans, unless they have a natural hedge, so that the bank's asset quality is not impaired. So the onus now lies with the banks," he said.

In fact, corporates are finally taking some tentative steps towards hedging their forex borrowings, especially in the backdrop of an unexpected weakening in the domestic currency, according to market participants.

Even if the current volatility in the rupee is on account of RBI intervention, it has made both importers and corporates slightly jittery about the outlook on the rupee.

"The view continues to be that the rupee will appreciate in the medium-term. But one can never predict how the market will turn, especially because the strengthening of the rupee has more to do with a weakness in the dollar. With all the positive data emanating about the US economy, once the dollar recovers, the rupee is bound to fall. The only question is will it be sooner rather than later?"

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