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Mumbai, Aug. 19

RATING agency Crisil would ascertain if banks have taken cover (hedge) for risks from exposure to commodities through lending to corporates, as part of their rating process, said Mr P. Ravimohan, Managing Director and CEO, Crisil Ltd.

Banks should be allowed to insist that their borrowers, who deal in commodities or agri products, should enter into forward contracts, in order to hedge against losses due to spot price fluctuation. This will, in turn protect banks from losses arising out of exposure to commodities, he said, on the sidelines of a seminar organised by the Confederation of Indian Industry.

At present, banks are not allowed to hedge exposures, but the development of the commodities market and introduction of products like options may permit it.

"Banks can lessen their risk by buying options. By preventing banks from taking hedges we are preventing them from taking precaution against price fluctuation," Mr Ravimohan said.

Mutual funds, too, should be allowed to enter in the forward market to hedge against the drop in share prices of corporates that deal in commodities, he said. Banks' role was limited due to the regulatory restrictions, he added.

(This article was published in the Business Line print edition dated August 20, 2005)
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