Cautious mode

Mumbai, Dec. 10: The Reserve Bank of India (RBI) has again asked banks to keep close tabs on the unhedged foreign exchange exposures of their clients.

It has asked them to monitor and review on a monthly basis the open positions of all companies with fairly large foreign currency exposures.

This is not the first time that the central bank has sounded a note of caution on such exposures.

Companies have been granted considerable flexibility to hedge their forex exposures. However, many of them have tended to leave their exposures uncovered because of their perceptions of which way the market will move and their compulsions to tamp down on costs.

The RBI is worried that such exposures can impact the financial status of the companies in the event of severe uncertainties. This can also have an impact on bank assets.

Banks have already been told through a circular in 2003 that they should have a policy that explicitly recognises and takes into account risks arising on account of unhedged foreign exchange exposures of their clients.

Banks were also then advised that they could extend foreign currency loans only on the basis of a well-laid out policy with regard to the hedging of such foreign currency loans.

“We reiterate the instructions contained in the circular and advise that the broad policy of banks should cover unhedged foreign exchange exposure of all their clients, including small and medium enterprises,” the RBI said in a notification issued to banks today.

The RBI added that to arrive at the aggregate unhedged foreign exchange exposure of clients, their exposure from all sources, including foreign currency borrowings and external commercial borrowings, should be taken into account.

Bankers say the RBI is worried about the implications of such exposures particularly given an uncertain outlook on the exchange rate.