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Mumbai , Dec. 6

THE Reserve Bank of India on Saturday said that banks should extend foreign currency loans above $10 million only on the basis of a well laid-out policy of their boards with regard to hedging of the loan. The limit can also be lower that $10 million as may be deemed appropriate vis-à-vis the banks' portfolios of such exposures.

The RBI had made similar statements in the November 2003 Credit Policy but "it is noticed that despite the RBI's exhortations, hedging has not been ensured'' according to the central bank's release.

Unhedged exposures may entail significant but avoidable risks to some corporate balance sheets, possibly impacting the quality of banks' assets in some cases, it added.

According to the release, banks are advised that the policy for hedging, to be framed by their boards, may consider, as appropriate for convenience, excluding the following:

Where forex loans are extended to finance exports, banks may not insist on hedging but assure themselves that such customers have uncovered receivables to cover the loan amount.

Where the forex loans are extended for meeting forex expenditure.

The intention of this above approach is to ensure a policy by each bank that explicitly recognises and takes into account the risks arising out of forex exposures of their clients.

In October 2001 too, the central bank had advised that banks which have large exposures to corporates should monitor and review on a monthly basis, through a suitable reporting system, the unhedged portion of the foreign currency exposures of those corporates, whose total foreign currency exposure is relatively large (say, about $25 million or its equivalent).

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Banks told to extend foreign loan based on board's hedging policy

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