{"id":60667,"date":"2022-10-12T16:15:29","date_gmt":"2022-10-12T10:45:29","guid":{"rendered":"https:\/\/enterslice.com\/learning\/?p=60667"},"modified":"2022-10-12T16:15:32","modified_gmt":"2022-10-12T10:45:32","slug":"rbi-unhedged-foreign-currency-exposure-directions-2022","status":"publish","type":"post","link":"https:\/\/enterslice.com\/learning\/rbi-unhedged-foreign-currency-exposure-directions-2022\/","title":{"rendered":"RBI (Unhedged Foreign Currency Exposure) Directions 2022: An Analysis"},"content":{"rendered":"

The Foreign Currency Exposure is a risk associated with the business engaged in the activities of dealing in foreign currency transactions. The forex entities involved in the activities of transactions in different denominations shall hedge foreign currency exposure in the market<\/a> to avoid any risk of volatility in the exchange rates. The RBI further on this matter stated that unhedged foreign currency exposure is an area of concern not only for the individual organisation but also for the foreign organisation. Accordingly, the banks were given advisory through the issuance of various directions, guidelines and circulars to develop a framework for regular monitoring of entities that do not have a hedge. Henceforth, the present directions dated 11th<\/sup> October 2022 are issued by RBI, keeping in mind the references given by the bank. The present article will, therefore, discuss in detail the relevant provisions of the directions.<\/p>\n\n\n\n

Key takeaways from the Directions<\/h2>\n\n\n\n
  1. Earlier, the definition of “entities” include all those entities that have borrowed from Banks in Indian Rupees or Foreign Currency. However, the new definition is changed under the current directions, which state that an entity is a party to which the bank has exposure to any currency.<\/li>
  2. Earlier, the exposure arising from the derivative transaction is excluded from the purview of UFCE as an alternative method to compute UFCE. The revised direction has expanded the scope of exposure by including factoring transactions under the ambit of exclusion under Unhedged Foreign Currency Exposure.<\/li>
  3. Earlier, the banks could not obtain information on UFCE from smaller entities for certain reasons. Therefore, this problem is removed by providing the bank with an alternate facility to obtain UFCE from the FCE of such an entity.<\/li><\/ol>\n\n\n\n

    Appli<\/strong>cability of the Directions<\/strong><\/h2>\n\n\n\n

    The provision pertaining to the current directions shall apply to:<\/p>\n\n\n\n

    1. Commercial Banks<\/strong>[1]<\/strong><\/a><\/sup>, not including Payments Bank and RRBs<\/li>
    2. Overseas Branches<\/li>
    3. Subsidiaries of Banks incorporated in India.<\/li><\/ol>\n\n\n\n

      Key Definitions<\/h2>\n\n\n\n
      1. Entity:<\/strong> The direction defines an entity as a counter party to which the bank has exposure in any currency, including fund based or non-fund based.<\/li>
      2. Foreign Currency Exposure (FCE): <\/strong>The directions define foreign currency exposure as the gross sum of all the items listed on the entity’s balance sheet that have affected the profit & loss account due to modifications in the foreign exchange rates.<\/li>
      3. Unhedged Foreign Currency Exposure: <\/strong>The UFCE means FCE excluding all the items which are an effective hedge against each other.<\/li>
      4. EBID or Earnings before Interest and Depreciation: <\/strong>It shall be calculated as:<\/li><\/ol>\n\n\n\n

        EBID=<\/em><\/strong>Profit after Tax + Depreciation + Interest on debt + Lease Rentals<\/em><\/p>\n\n\n\n

        Computation of Unhedged Foreign Currency Exposure<\/h2>\n\n\n\n

        The directions state that the banks shall, on an annual basis<\/a>, ascertain the Foreign Currency Exposure (FCE) of all the entities. Moreover, in ascertaining the FCE, the banks shall also include all the sources of an entity’s exposure, including.<\/p>\n\n\n\n

        1. Foreign Currency Borrowings<\/li>
        2. External Commercial Borrowings<\/li><\/ol>\n\n\n\n

          Further, the banks shall use relevant accounting<\/a> standards that apply to the entity for computing foreign currency exposure.<\/p>\n\n\n\n

          Assessment of Unhedged Foreign Currency Exposure (UFCE):<\/em><\/strong> The banks are further required to ascertain the UFCE by obtaining such information from the concerned entity on quarterly basis. Further, the information on UFCE supplied to the bank must be audited and certified by a statutory auditor of the entity.<\/p>\n\n\n\n

          Provisioning and Capital Requirements<\/h2>\n\n\n\n

          The directions have stated various provisions by which the bank can ascertain the potential loss to an entity which are as follows:<\/p>\n\n\n\n

          1. Determination of Potential loss<\/h3>\n\n\n\n

          The bank is required to calculate the total potential loss to the entity from Unhedged Foreign Currency Exposure. It shall be determined by using the data published by FEDAI on the annual volatility rate in the USD-INR exchange rate for the last 10 years and multiplying it with the UFCE of an entity.<\/p>\n\n\n\n

          2. Determined the susceptibility of an entity towards changing Exchange Rate<\/h3>\n\n\n\n

          The bank is required to ascertain the susceptibility of an entity towards adverse exchange rate movements. It shall be determined by computing the ratio of potential loss to the entity from UFCE and the entity EBID (Earnings before interest and depreciation).<\/p>\n\n\n\n

          Information on EBID and UFCE not available:<\/em><\/strong>In case if the bank is unable to gather information on UFCE and EBID of an entity due to restrictions on disclosure of information, then, in that case, the bank can compute the susceptibility ratio by using data that is immediately preceding the last four quarters.<\/p>\n\n\n\n

          Information on EBID and UFCE not available for Unlisted Entities: <\/em><\/strong>In case if the information on EBID and UFCE is not available due to the non-availability of the last audited results of the last quarter, then, in that case, the bank shall undertake the latest quarterly and annual result. However, the EBID figure shall be for the last financial year.<\/p>\n\n\n\n

          3. Incremental Provisioning and Capital Requirement<\/h3>\n\n\n\n

          The direction has determined the figure for computing the incremental provisioning and capital requirements which are as follows:<\/p>\n\n\n\n

          Potential Loss or EBID ( in Percentage)<\/strong><\/td>Incremental provisioning Requirements<\/strong><\/td>Incremental Capital Requirements<\/strong><\/td><\/tr>
          Up to 15 %<\/td>0<\/td>0<\/td><\/tr>
          15% to 30%<\/td>20 BPS<\/td>0<\/td><\/tr>
          30% to 50%<\/td>40 BPS<\/td>0<\/td><\/tr>
          50% to 75%<\/td>60 BPS<\/td>0<\/td><\/tr>
          More than 75%<\/td>80 BPS<\/td>Risk weight + 25%<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

          Further, the bank is required to calculate the incremental requirements on quarterly basis. <\/p>\n\n\n\n

          Information on New Entities:<\/em><\/strong> The bank shall calculate the incremental requirements of a new entity on the projected average annual EBID for 3 years starting from the commencement of business operations, provided that the requirement shall not be more than 20 BPS.<\/p>\n\n\n\n

          Sufficient information not available on assessing UFCE and Computing Incremental requirements: <\/em><\/strong>In case if the bank is unable to assess the UFCE and Incremental requirement, in that case, the bank can place the entity in the bracket of 80 BPS and 25% increase in Risk weight.<\/p>\n\n\n\n

          Information not provided by small entities: <\/em><\/strong>In case if small entities whose total exposure to the banking system is Rs 50 Crore or less are unable to provide any information on UFCE, in that case, the banks shall apply incremental provisioning of 10 BPS.<\/p>\n\n\n\n

          Inclusion of System and Controls<\/strong><\/h2>\n\n\n\n

          The direction has mandated that banks formulate a credit risk management<\/strong><\/a> policy that will incorporate the risk of UFCE of entities in their internal credit rating system. Moreover, the bank must set an internal limit for UFCE within its board-approved policy.<\/p>\n\n\n\n

          Monitoring of Unhedged Foreign Currency Exposure by Consortium Leader<\/strong><\/h2>\n\n\n\n

          The directions state that the consortium leader of multiple banking arrangements shall be responsible for monitoring the UFCE on their behalf. Further, all the banks shall put in place a system that will ensure the uninterrupted sharing of information in accordance with the SEBI circular on“Lending under Consortium Arrangement \/ Multiple Banking Arrangements”<\/em><\/strong>dated 8th<\/sup> December 2022.<\/p>\n\n\n\n

          Exemptions to the calculation of Unhedged Foreign Currency Exposure<\/strong><\/h2>\n\n\n\n

          The directions have provided certain exposures that can be relaxed by the bank when taking into account UFCE exposure which are as follows:<\/p>\n\n\n\n

          1. Exposure to Certain entities classified as:<\/li>
          2. Sovereign, including Domestic and foreign sovereigns as defined in para 5.2 and 5.3 of Master Circular on Basel III Capital Regulations dated 1st<\/sup> April 2022.<\/li>
          3. Banks, including RBI, regulated financial institutions, Bank of International Settlement, International Monetary Fund and Multilateral Development banks.<\/li>
          4. Individuals<\/li>
          5. Exposure termed as NPA (Non-Performing Asset)<\/li>
          6. Intra-group foreign currency exposure of MNCs incorporated outside India<\/li>
          7. Exposure arising from the derivative and factoring transactions is subject to the condition that the entity does not have any other exposure to the bank in India.<\/li><\/ol>\n\n\n\n

            Overseas Branches or Subsidiaries<\/strong><\/h2>\n\n\n\n

            The direction states that instruction of these directions shall apply to overseas branches of the banks, provided:<\/p>\n\n\n\n

            1. That the information on Unhedged Foreign Currency Exposure of entities incorporated outside India shall be obtained on quarterly basis. Further, the requirement of a certificate is not required from such entities. In case, if the bank is unable to obtain information on UFCE, in that case, the bank can place the entity in the bracket of 80 BPS and 25% increase in Risk weight.<\/li>
            2. The banks shall compute the potential loss from UFCE by replacing INR with the domestic currency of that jurisdiction and USD with a foreign currency (other than that of the domestic currency). <\/li><\/ol>\n\n\n\n

              Circular that becomes ineffective<\/strong><\/h2>\n\n\n\n

              By issuing the current directions, it has repealed certain circulars, which are as follows:<\/p>\n\n\n\n

              Repealed Circulars<\/strong><\/td>Date<\/strong><\/td><\/tr>
              Monetary & Credit Policy Measures – Mid-Term Review(2001-2002) – UFCE (Unhedged Foreign Exposure) of Corporates<\/td>27th<\/sup> October 2001<\/strong><\/td><\/tr>
              Mid-term Review of Monetary and Credit Policy (2003-04) – UFCE (Unhedged Foreign Exposure) of Corporates<\/td>5th<\/sup> December 2003<\/strong><\/td><\/tr>
              UFCE(Unhedged Foreign Exposure) of Clients – Monitoring by Banks<\/td>10th<\/sup> December 2008<\/strong><\/td><\/tr>
              Second Quarter Review of Monetary Policy 2011-12 – Unhedged Foreign Currency Exposure of Corporates<\/td>2nd<\/sup> February 2012<\/strong><\/td><\/tr>
              Second Quarter Review of Monetary Policy 2012-13 – Unhedged Foreign Currency Exposure of Corporates<\/td>21st<\/sup> November 2012<\/strong><\/td><\/tr>
              Capital & Provisioning Requirements for Exposures to entities with UFCE<\/td>15th<\/sup> January 2014<\/strong><\/td><\/tr>
              Capital & Provisioning Requirements for Exposures to entities with UFCE-Clarifications<\/td>3rd<\/sup> June 2014<\/strong><\/td><\/tr>
              Capital & Provisioning Requirements for Exposures to Entities with UFCE<\/td>8th<\/sup> July 2016<\/strong><\/td><\/tr>
              Capital & Provisioning requirements for exposures to entities with UFCE<\/td>17th<\/sup> February 2021<\/strong><\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n

              Conclusion<\/strong><\/h2>\n\n\n\n

              The present directions are issued to protect the entities from volatility in the foreign exchange rates. The RBI first issued the instructions on UFCE as a measure of risk management systems after it was observed that banks bear additional credit risk on entities which have unhedged foreign currency risk. The framework further mandated the bank to obtain information on UFCE, audited by a statutory auditor on a quarterly or annual basis and further compute the risks from such information. Hence, the present directions provide a comprehensive structure for unhedged foreign currency exposure.<\/p>\n\n\n\n

              Read our Article<\/b>: A Complete Analysis of RBI Exposure Norms for NBFC<\/a> in India<\/a><\/mark><\/p>\n","protected":false},"excerpt":{"rendered":"

              The Foreign Currency Exposure is a risk associated with the business engaged in the activities of dealing in foreign currency transactions. The forex entities involved in the activities of transactions in different denominations shall hedge foreign currency exposure in the market to avoid any risk of volatility in the exchange rates. The RBI further on […]<\/p>\n","protected":false},"author":69,"featured_media":60670,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[2620],"tags":[4734],"acf":{"service_id":"112"},"yoast_head":"\nRBI (Unhedged Foreign Currency Exposure) Directions 2022 - Enterslice<\/title>\n<meta name=\"description\" content=\"The revised direction has expanded scope of exposure by including factoring transactions under ambit of exclusion under Unhedged Foreign Currency Exposure.\" \/>\n<meta name=\"robots\" content=\"index, follow\" \/>\n<meta name=\"googlebot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<meta name=\"bingbot\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/enterslice.com\/learning\/rbi-unhedged-foreign-currency-exposure-directions-2022\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"RBI (Unhedged Foreign Currency Exposure) Directions 2022 - Enterslice\" \/>\n<meta property=\"og:description\" content=\"The revised direction has expanded scope of exposure by including factoring transactions under ambit of exclusion under Unhedged Foreign Currency Exposure.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/enterslice.com\/learning\/rbi-unhedged-foreign-currency-exposure-directions-2022\/\" \/>\n<meta property=\"og:site_name\" content=\"Enterslice\" \/>\n<meta property=\"article:publisher\" content=\"https:\/\/www.facebook.com\/enterslice\" \/>\n<meta property=\"article:author\" content=\"omvir\" \/>\n<meta property=\"article:published_time\" content=\"2022-10-12T10:45:29+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2022-10-12T10:45:32+00:00\" \/>\n<meta property=\"og:image\" content=\"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2022\/10\/MicrosoftTeams-image-58.jpg\" \/>\n\t<meta property=\"og:image:width\" content=\"920\" \/>\n\t<meta property=\"og:image:height\" content=\"483\" \/>\n<meta name=\"twitter:card\" content=\"summary\" \/>\n<meta name=\"twitter:creator\" content=\"@enterslice\" \/>\n<meta name=\"twitter:site\" content=\"@enterslice\" \/>\n<!-- \/ Yoast SEO plugin. -->","authorName":"Nikhil Mogha","authorImageUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2022\/08\/MicrosoftTeams-image-119.jpg","authorDescription":"An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.","postViews":744,"readingTime":6,"nextPost":{"id":60671,"slug":"rbi-circular-on-multiple-nbfcs-in-a-group-classification-in-middle-layer"},"prevPost":{"id":60663,"slug":"guide-to-foreign-liabilities-and-asset-return-filing"},"featuredMediaUrl":"https:\/\/enterslice.com\/learning\/wp-content\/uploads\/2022\/10\/MicrosoftTeams-image-58.jpg","postTerms":"RBI Notification","_links":{"self":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/60667"}],"collection":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/users\/69"}],"replies":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/comments?post=60667"}],"version-history":[{"count":0,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/posts\/60667\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media\/60670"}],"wp:attachment":[{"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/media?parent=60667"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/categories?post=60667"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/enterslice.com\/learning\/wp-json\/wp\/v2\/tags?post=60667"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}