May 05 2013 , Mumbai
New hedging norm can drive firms to rupee debt
Foreign currency loans for Indian companies may turn expensive after the Reserve Bank of India (RBI) directed banks to evaluate risks arising from such unhedged loans by increasing the provisioning.
This is expected to drive borrowers to domestic rupee loans or the external commercial borrowings, said industry officials.
“If the RBI makes it mandatory to fully hedge the principal and the interest on the foreign currency loan, then it will increase the provisioning of the banks and they will pass it on with higher spreads to the borrowers, making the loan costly. Hence, the new provision would become counterproductive, reducing the total foreign currency loan intake,” said a senior official of L&T.
“At present, on a fully hedged basis – both interest and the principal – foreign currency loan is available at 12 per cent to 12.5 per cent. There are other companies who are getting loans at 13 per cent, which is hardly one per cent more. Hence, any higher provision would drive borrowers away,” he added, declining a request to be identified by name.
The central bank, in its monetary policy statement on Friday, said banks should put in place a proper mechanism to rigorously evaluate the risks arising out of unhedged foreign currency exposure of companies and price them in the credit risk premium. It also asked them to consider a limit on the unhedged positions of companies.
The final guidelines on higher provisioning for unhedged forex loans are expected on June 30.
According to RBI, these measures are of utmost importance since unhedged forex exposures of borrowers are a source of risk not only to them, but also to the financing banks and the financial system, especially in times of currency volatility. “The measures need to be strengthened by requiring the companies to put in place a risk management policy for their unhedged forex exposures,” the RBI note said.
"These measures have not yet been adequately put in place. In view of this and in order to address the risks on account of unhedged forex exposure of companies, it is proposed to increase the risk weight and provisioning requirement on banks’ exposures to companies on account of the companies’ unhedged forex exposure positions,” the note added.
Another official from GMR concurred that if there was higher provisioning for the unhedged portion of the loans, the banks would have to separately keep some money aside. This higher provision would then be passed on to the borrowers in terms of higher rates, making it unattractive. However, there are companies who have a natural hedge for whom the higher provisions would not apply, like in case of Delhi Airport, which has duty-free income in dollars and the aviation turbine fuel that is charged in dollars on international operators, the GMR official said.
A senior treasury official of TCS said, what RBI was trying to do was to ensure good control over companies that had not yet disclosed the hedged and unhedged portions of their total loan portfolio. The public sector companies normally do not hedge fully. It is not feasible to hedge for 10-year terms as the cost is very high and also the volatility may not be as much as expected.
AK Prabhakar, senior vice president and head of retail research at Anand Rathi believes it is advisable to know the unhedged portion of companies since a lot of infrastructure companies that borrow abroad, also borrowed in India, and they were highly leveraged, creating serious problems during currency volatility. They are not properly hedged. “The mandatory hedging would rein in their appetite to borrow,” Prabhakar said.
This is expected to drive borrowers to domestic rupee loans or the external commercial borrowings, said industry officials.
“If the RBI makes it mandatory to fully hedge the principal and the interest on the foreign currency loan, then it will increase the provisioning of the banks and they will pass it on with higher spreads to the borrowers, making the loan costly. Hence, the new provision would become counterproductive, reducing the total foreign currency loan intake,” said a senior official of L&T.
“At present, on a fully hedged basis – both interest and the principal – foreign currency loan is available at 12 per cent to 12.5 per cent. There are other companies who are getting loans at 13 per cent, which is hardly one per cent more. Hence, any higher provision would drive borrowers away,” he added, declining a request to be identified by name.
The central bank, in its monetary policy statement on Friday, said banks should put in place a proper mechanism to rigorously evaluate the risks arising out of unhedged foreign currency exposure of companies and price them in the credit risk premium. It also asked them to consider a limit on the unhedged positions of companies.
The final guidelines on higher provisioning for unhedged forex loans are expected on June 30.
According to RBI, these measures are of utmost importance since unhedged forex exposures of borrowers are a source of risk not only to them, but also to the financing banks and the financial system, especially in times of currency volatility. “The measures need to be strengthened by requiring the companies to put in place a risk management policy for their unhedged forex exposures,” the RBI note said.
"These measures have not yet been adequately put in place. In view of this and in order to address the risks on account of unhedged forex exposure of companies, it is proposed to increase the risk weight and provisioning requirement on banks’ exposures to companies on account of the companies’ unhedged forex exposure positions,” the note added.
Another official from GMR concurred that if there was higher provisioning for the unhedged portion of the loans, the banks would have to separately keep some money aside. This higher provision would then be passed on to the borrowers in terms of higher rates, making it unattractive. However, there are companies who have a natural hedge for whom the higher provisions would not apply, like in case of Delhi Airport, which has duty-free income in dollars and the aviation turbine fuel that is charged in dollars on international operators, the GMR official said.
A senior treasury official of TCS said, what RBI was trying to do was to ensure good control over companies that had not yet disclosed the hedged and unhedged portions of their total loan portfolio. The public sector companies normally do not hedge fully. It is not feasible to hedge for 10-year terms as the cost is very high and also the volatility may not be as much as expected.
AK Prabhakar, senior vice president and head of retail research at Anand Rathi believes it is advisable to know the unhedged portion of companies since a lot of infrastructure companies that borrow abroad, also borrowed in India, and they were highly leveraged, creating serious problems during currency volatility. They are not properly hedged. “The mandatory hedging would rein in their appetite to borrow,” Prabhakar said.
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