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Faced with incremental provisioning and capital requirements, banks may up their lending rates to companies with un-hedged foreign currency exposure (UFCE).
Beginning April 1, 2014, banks are required to set aside capital to deal with the ripple effect arising from the reduced capacity of companies with UFCE to service loans during times of adverse/volatile currency movements.
“For no fault of theirs, banks are being penalised for the un-hedged foreign currency exposure of companies. So, to minimise the impact of the RBI directives in this regard, banks have no choice but to increase the lending rates for such companies,” said a senior Central Bank of India official.
The possibility of a hike in lending rate could exert pressure on companies to reduce their UFCE. This, in turn, can lighten banks’ provisioning burden.
Foreign Currency Exposure (FCE) refers to the sum of all items on the balance sheet that have an impact on the profit and loss account due to movement in foreign exchange rates.
If the FCE of companies is significant and remains un-hedged, then in times of adverse currency movements it could cause them to suffer losses, which in turn increases the probability of default on loans taken by them from banks.
According to the RBI, UFCE pertains to total UFCE of a company and is not limited to the un-hedged portion of the bank’s exposure to the company. Banks have to obtain this information separately from the company under certification by statutory auditors on a quarterly basis.
The extent of un-hedged foreign currency exposures of the entities continues to be significant and banks have to closely monitor such exposures of their borrowing clients, the central bank said. However, it has not quantified the extent of UFCE of companies.
Among the banks that have made provisions towards the un-hedged foreign currency exposure of their corporate clients in the April-June quarter include: Bank of Baroda (₹54.11 crore), Axis Bank (₹48 crore), IndusInd Bank (₹20 crore) and Central Bank of India (₹8 crore).
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