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Tuesday, Nov 04, 2003

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Hedging made compulsory for foreign currency loans over $10 m

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The RBI Governor, Dr Y.V. Reddy, with CMDs of banks, unveiling the mid-year review of the Monetary and Credit Policy in Mumbai on Monday. - Shashi Ashiwal

Mumbai , Nov. 3

CORPORATES will have to hedge all foreign currency loans above $10 million.

In its mid-term review of the Credit Policy, the RBI has made hedging mandatory for all foreign currency loans. According to the RBI, unhedged corporate borrowings have been a cause for concern over the past couple of years. Aside from the significant risk entailed to corporate balance sheets, it is also likely to impact the asset quality of banks in some cases.

However, banks are allowed not to insist on a hedge, in cases where forex loans are extended to finance exports, and the borrower has uncovered receivables to cover the loan amount.

Hedging is also not insisted upon, in cases where forex loans are extended for meeting forex expenditure.

Speaking to presspersons here today, Dr Y.V.Reddy, RBI Governor, said, "Earlier we were urging and exhorting, but now we are making it amply clear.''

The apex bank's latest measure has evoked mixed reactions from bankers. While a section of bankers have already been insisting on borrowers hedging their foreign currency loans, some others are of the opinion that such a measure from the RBI will impede corporate liberty to act on its own view on the currency.

Mr Y.M. Deosthalee, Director and CFO, Larsen and Toubro, said, "Though this is a good initiative, in the longer run the RBI has to ensure that exporters and corporates who need forex loans for financing import requirements do not suffer. We don't expect too much of impact in the short term, as FCNR loans are not available at reasonable rates."

According to Mr Anil Singhvi, Director, Finance, Gujarat Ambuja, one can see an element of overcautious judgment in the RBI measure.

"Some of these corporates have really sophisticated treasuries, maybe even more modern than some banks. This measure will prove cumbersome for them as they will be forced to hedge at a point when they might not feel the need to do so," said a senior official with a public sector bank.

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