RBI guidelines on management of foreign currency exposure
The Reserve Bank of India tweaked some of its guidelines for banks to manage their foreign currency exposure, in an attempt to reduce the risk of unhedged exposure on the banking system during extreme volatility in forex markets.
Banks will have to ascertain the foreign currency exposure (FCE) of all entities at least annually, the RBI said, adding the revised rules will be effective from Jan. 1, 2023. The revised rules, though, expanded the scope of exemptions, allowing banks to exclude exposures from ‘factoring transactions’ from now on, apart from exposures arising out of derivative transactions. Banks shall determine the potential loss to an entity from unhedged foreign currency exposure (UFCE) using the largest annual volatility in the rupee-dollar exchange rate in the last ten years, the RBI said.
Entities which do not hedge their foreign currency exposures can incur significant losses during the period of heightened volatility in foreign exchange rates,” the RBI said. “These losses may reduce their capacity to service the loans taken from the banking system and increase their probability of default, thereby affecting the health of the banking system.”
Credit rating without lenders info cannot be used by banks for capital computation
To improve ratings disclosures on bank credit to large customers, RBI mentioned that unless rating agencies disclose names of all lenders in their rating statements, banks cannot use such ratings for capital computation for making provisions.
As part of the master circular on Basel III capital regulations, issued on April 1, 2022, the monetary authority had asked rating agencies to disclose the name of all the banks in the credit rating statements after getting the consent from borrowers from August 31, 2021. But they have not been doing so citing their inability to secure the consent from borrowers.Such disclosures make banks eligible to compute their capital requirement for such loans and make the needed capital provisions.
It is observed that the press releases issued by rating agencies on rating actions are often devoid of the lenders’ details. Absence of such information may result in banks applying the derived risk weights for unrated exposures, without satisfying themselves regarding adherence to prescribed conditions. This may, consequently, lead to potentially lower provision of capital as well as underpricing of risks,” the central bank said in the latest notification, which is aimed at addressing such information asymmetry.
IRDAI offer more flexibility to general insurance companies
The Insurance Regulatory & Development Authority of India has offered more flexibility to general insurance companies in designing and pricing of products under miscellaneous lines of business and allowed them to launch these in the market without prior regulatory approval. This is to facilitate the industry to respond faster to the emerging market needs in terms of designing and pricing of general products and to promote efficiency in the conduct of general insurance business.
Now, IRDAI has extended the ‘Use and File’ procedure, ie. launching insurance products without prior approval, to all categories “in its sustained endeavour to promote creative innovation and ease of doing business”.
