RBI tweaks guidelines for banks to handle overseas foreign money publicity

The Reserve Financial institution of India tweaked a few of its pointers for banks to handle their overseas foreign money publicity, in an try to cut back the chance of unhedged publicity on the banking system throughout excessive volatility in foreign exchange markets.

Banks could be required to evaluate the unhedged overseas foreign money exposures of all counterparties to whom they’ve an publicity in any foreign money, going forward, the RBI stated in a launch on Tuesday.

The rupee has shed almost 11% towards the greenback to date this yr and has hit a collection of document lows in latest weeks.

Banks should verify the overseas foreign money publicity (FCE) of all entities at the least yearly, the RBI stated, including the revised guidelines might be efficient from Jan. 1, 2023.

The revised guidelines, although, expanded the scope of exemptions, permitting banks to exclude exposures from ‘factoring transactions’ to any extent further, other than exposures arising out of spinoff transactions.

Banks shall decide the potential loss to an entity from unhedged overseas foreign money publicity (UFCE) utilizing the most important annual volatility within the rupee-dollar change price within the final ten years, the RBI stated.

“Entities which don’t hedge their overseas foreign money exposures can incur important losses throughout the interval of heightened volatility in overseas change charges,” the RBI stated.

“These losses might cut back their capability to service the loans taken from the banking system and enhance their chance of default, thereby affecting the well being of the banking system.”

The RBI stated if the potential loss from an entity’s UFCE is greater than 75%, banks would wish to offer for a 25 share level enhance in whole threat weight, over and above the relevant threat weight to that entity.

“It is because the exposures falling in identical bucket may have equal enhance of their riskiness regardless of the unique threat weight relevant,” the apex financial institution stated.