CHAPTER 06
UNHEDGED FOREIGN CURRRENCY EXPOSURE POLICY
CHAPTER 06
UNHEDGED FOREIGN CURRENCY EXPOSURE POLICY
INDEX
Para No
1
TOPIC
SCOPE
Page No
3
2
DEFINITION
4
3
COMPUTATION OF UNHEDGED FOREIGN CURRENCY
EXPOSURE (UFCE)
6
4
GUIDELINES FOR PERMITTING WAIVER OF
BOOKING
FORWARD CONTRACTS OR OTHER
DERIVATIVES
CREDIT RATING AND LOAN PRICING
8
5
6
12
18
7
8
INCREMENTAL CAPITAL AND PROVISIONING
REQUIREMENTS FOR EXPOSURES TO ENTITIES
WITH UNHEDGED FOREIGN CURRENCY EXPOSURES
OTHER MATTER
MONITORING
9
Compliance with Statutory/Regulatory requirements
23
REVIEW
Annexure
UNHEDGED FOREIGN CURRENCY EXPOSURES FROM ALL
SOURCES
23
10
Annex No
2
2
20
22
24
ANNEXURE I
Policy of Unhedged Foreign Currency Exposure of Clients.
1. SCOPE
1.1.
These guidelines will apply to Unhedged Foreign Currency
Exposure (UFCE) of clients from all sources.
1.2.
Unhedged Foreign Currency Exposure (UFCE) refers to the gross
sum of all items on the balance sheet that have impact on profit
and loss account due to movement in foreign exchange rates.
Items maturing or having cash flows over the period of next five
years only may be considered.
1.3.
UFCE from all sources consists of
1.3.1. Foreign Currency Loans (FCL) availed by the client from
our bank.
1.3.2. FCL availed by the client from other banks under
consortium/multiple banking arrangements.
1.3.3. Foreign Currency Convertible Bond (FCCB), Medium Term
Note (MTN), Plain vanilla Bonds or any other debt
instruments issued by the client for raising Foreign
Currency funds from foreign investors.
1.3.4. Foreign Currency Loans will also include ECBs (External
Commercial Borrowings), Letter of Comfort for issuing
Buyer’s credit, Import Letters of Credit (Usance) after
acceptance of document, FCL in lieu of Rupee
denominated Working Capital, FCTL (Foreign Currency
Term Loan) in lieu of Rupee denominated Term Loan,
other short-term loans denominated in foreign currency.
1.4.
Export advances in the form of PCFC and Bills discounting in
foreign currency will not be considered under UFCE, as they are
liquidated by foreign currency inflows and as movements in
foreign exchange rates will not have impact on the clients’ assets
and liabilities & on profit and loss account.
1.5.
Unhedged Foreign Currency Exposure (UFCE) pertains to total
unhedged exposure of the corporate and is not limited to
unhedged portion of our bank’s exposure to the corporate. UFCE
in currencies other than USD may be converted to USD at market
rates and total amount of UFCE may be computed in USD.
3
2. DEFINITION
In this policy the terms are used with the following meaning:
2.1. “Economic Hedge” means –
2.1.1. It may be considered when cash flows arising out of the
operations of the company offset the risk arising out of
the UFCE defined above and such cash flows are linked to
foreign exchange rate applicable on the date of such cash
flows, though cash flows are in local currency.
2.1.2. For example, Indian company receiving its receivables for
goods /services supplied in India in INR. However, INR is
computed linked to USD/INR rate applicable on the date
of payment.
2.2. “Financial Hedge” means –
2.2.1. For the purpose of UFCE computation, exposure already
hedged through derivative transaction/s would be
deducted from Total Foreign Currency exposure. It is
ensured normally through a derivative contract with a
bank.
2.2.2. Hedging through derivatives may only be considered
where the entity at inception of the derivative contract
has documented the purpose and the strategy for hedging
and assessed its effectiveness as a hedging instrument at
periodic intervals.
2.2.3. If the client has undertaken any cross currency derivative
transaction for underlying foreign currency payables,
whereby he assumes risk in other foreign currency
without crystallizing liability in Indian Rupees, then such
other foreign currency exposure will be captured as
outflows for the purpose of above calculations.
2.2.4. If the client has undertaken any cross currency derivative
transaction for underlying foreign currency receivables,
whereby he assumes risk in other foreign currency
without crystallizing receivables in Indian Rupees, then
such other foreign currency exposure will be captured as
inflows for the purpose of above calculations.
2.3. “Natural Hedge” means–
2.3.1. Ordinarily, Forex exposure can be treated as “naturally
hedged” if the client is having uncovered receivables
4
with dates nearly corresponding to liability due date
(explained in para 2.3.2) to cover the UFCE.
2.3.2. It may be considered when cash flows arising out of the
operations of the company offset the risk arising out of
the UFCE defined above. For the purpose of this policy,
an exposure may be considered naturally hedged if the
offsetting exposure has the maturity/cash flow within the
same accounting year. For instance, export revenues
(booked as receivable) may offset the exchange risk
arising out of repayment obligations of an external
commercial borrowing if both the exposures have cash
flows/maturity within the same accounting year.
2.3.3. “UFCE (B)” means Unhedged Foreign Currency Exposure
towards our Bank out of UFCE.
2.4. “Independent Treasury” means –
2.4.1. A separate designated department or unit or section
established within the company/firm or its group of
companies/firms. If such department or unit or section is
for the group of companies, then it should have been
assigned the responsibilities of overseeing treasury
operations of the company, who has UFCE, and
2.4.2. Such department or unit or section is manned with
personnel who have adequate experience of handling
foreign exchange transactions and have adequate
knowledge of intricacies and risks involved in foreign
exchange transactions and
2.4.3. Such company/firm or its group of companies/firms has
proper Risk Management Policy in place, which broadly
covers
2.4.3.1
Identification of Foreign exchange risks the
company/firm or its group of companies/firms is
exposed to due to the nature, size, volume of
business activity
2.4.3.2. Process of identifying and managing these risks
through a variety of risk management tools
2.4.3.3. Process of monitoring and controlling/mitigating
the risks
2.4.3.4. Process for reporting the key parameters
measuring the risks incorporating risk mitigants,
setting up risk tolerance limits in relation to
adverse movements of currency rates, impact of
5
adverse movements of currency rates on their
financial positions.
2.4.3.5. The authority and responsibility structure with
regard to management of foreign exchange risks,
2.4.3.6. There is segregation of duties of Front Office and
Back Office/Mid Office within such department
or unit or section, and
2.4.3.7. The Director/Chief Financial Officer/Finance
Director/Partner or any other person who heads
the Finance and Treasury operations submits an
undertaking that the company/firm or its group
of companies/firms conforms to all above
criteria.
3.
COMPUTATION OF UNHEDGED FOREIGN CURRENCY
EXPOSURE (UFCE)
3.1.
Foreign Currency Exposure of the client, from all sources as
defined in para 1.3.1 to 1.3.4, maturing over the period of
next five years only to be considered.
3.2.
Export Receivables/Natural Hedge
3.2.1. Export receivables/Natural hedge as stated in para 2.3
(excluding export receivables already discounted with the
Bank/s) will be deducted from Foreign Currency Exposure
from all sources.
3.2.2. It may happen that the client may be having orders on
hand maximum for one year and not for the next five
years. However, considering its past turnover, it can be
established that the company has capability to effect
exports for the next five years.
Factoring export
receivables only based on present orders on hand would
give distorted position of UFCE.
3.2.3. Therefore, based on last five year’s average exports,
projection can be accepted for the next five years. Such
projected export receivables may be considered for the
purpose of para 3.2.1, provided the company is
continuously effecting exports for the last five years.
3.2.4. If the company is new or there are no exports on regular
basis for last five years, amount of the actual orders on
hand be considered for the purpose of para 3.2.1.
3.2.5. Less balance in EEFC (Exchange Earners Foreign Currency)
account
6
3.3.
Financial hedge
3.3.1. Financial hedge as defined in para 2.2 to be deducted from
Foreign Currency Exposure from all sources.
3.3.2. Less Financial hedge as defined in para 2.2.4
3.3.3. Add Financial hedge as defined in para 2.2.3
3.3.4. For computing financial hedge, principles stated in para
3.2.1 to 3.2.4, would also be applicable for computing
financial hedge.
3.4.
Economic hedge
Economic hedge as defined in para 2.1 to be deducted from
Foreign Currency Exposure from all sources
3.5.
For the purpose of above computation, all cash
flows/obligations to be considered within the same accounting
year. For instance, export revenues (booked as receivables)
may offset the exchange risk arising out of repayment
obligations of an external commercial borrowing if both the
exposures have cash flows/maturity within the same
accounting year.
3.6.
This can be explained through following example.
(USD in 000)
Financial Years
Total
Foreign
Currency
Exposure from all
sources as per
paras 1.3.1. to
1.3.4
2
Export
Receivables/Natural
hedge,
Economic
hedge,
financial
hedge, EEFC as per
paras 3.2 to 3.5
3
Year 1
100
50
50
Year 2
200
250
Nil
Year 3
150
175
Nil
Year 4
300
158
142
Year 5
500
158
342
1250
791
534
1
Net position
Unhedged
Foreign
Currency
Exposure (UFCE)
4=(2 minus 3)
In above illustration, UFCE for year 2 and 3, considered Nil as Export
receivables and hedges are more than the company’s Foreign Currency
obligations during these financial years and it is assumed that the
company would be able to meet its FC obligations towards the Bank.
7
4.
GUIDELINES FOR PERMITTING WAIVER OF BOOKING
FORWARD CONTRACTS OR OTHER DERIVATIVES.
4.1. UFCE is an area of concern not only for individual entity, but also to
the entire financial system. Entities, who do not hedge their UFCE,
can incur significant losses due to exchange rate movements. These
losses may reduce their capacity to service the loans taken from the
entire banking system and thereby affect the health of the banking
system.
4.2. UFCE as defined above captures details of unhedged foreign
currency positions of the entity from entire banking system.
However, there is more probability of default of the customer to
the institutions/banks with whom he has direct exposures. For
example, if the customer has Foreign Currency obligations towards
A Bank and with other bank/s, he is enjoying only INR facilities,
there is more probability of making default of his obligation towards
Bank A and credit risks to other Banks would be comparatively less.
4.3. In view of the above, while approving waiver we propose considering
Unhedged Foreign Currency exposure of the customer towards our
bank only (“UFCE(B)”) and not Unhedged Foreign Currency exposure
of the customer from all sources (“UFCE). For example, if customer
A, has UFCE(B) USD 10 Mio and UFCE is USD 100 Mio, for the purpose
of granting waiver, delegated authority will be in relation to USD 10
Mio.
4.4. For the sake of clarity, it is stated that para 4 deals only with
delegation with regard to granting concession/waiver on Unhedged
Foreign Currency Exposure of the client for FC obligations towards
our bank i.e. UFCE(B). Charging credit premium and incremental
provisioning & capital requirements for our bank’s exposures to the
customer with regard UFCE of the customer from all sources are
discussed separately in other paragraphs (i.e paras 5 to 7).
4.5. For considering UFCE(B), economic hedges with our bank and also
with other banks/institutions would be taken into consideration,
provided the customer at inception of the derivative contract has
documented the purpose and the strategy for hedging and assessed
its effectiveness as a hedging instrument at periodic intervals and
such derivative is undertaken for underlying obligations towards our
bank.
4.6. In case of Export Receivables/Natural hedge, Economic Hedge, EEFC
etc. they will be considered on pro-rata basis for arriving at UFCE(B).
This is being explained through the following example –
 Foreign Exposures towards our bank .. USD 20 Mio
 Foreign Exposures from all sources .. USD 100 Mio
i.e. 20% of exposures from all sources.
 Export Receivables/Natural hedge, Economic Hedge, EEFC
..USD 80 Mio. Therefore 20% of it be offset for FC obligations
towards our bank i.e. USD 16.00 Mio
 Net Unhedged Foreign Currency Exposure will be USD 4.00 Mio
(USD 20 Mio minus USD 16 Mio)
8

Approval for waiver of booking forward contract/derivative to
be sought from the delegated authority is for USD 4.00 Mio
4.7. DELEGATED AUTHORITY FOR PERMITTING WAIVER WITH REGARD
TO UFCE(B)
4.7.1. All customers having UFCE (B) would be asked to fully hedge their
unhedged foreign currency exposure through one or more
derivatives like forwards, options etc.
4.7.2. For considering waiver, the sanctioning authority will take into
consideration the following factors
4.7.2.1. Past track record of the client, risk management policy of
the client, experience of the persons managing the
treasury operations of the company, Net Worth, Turnover
etc
4.7.2.2. Internal credit rating of the client is of CR1 to CR4 only.
Clients with lower rating will be considered for waiver of
hedging requirement on case to case basis. Such
exceptions will be considered by the authority which is one
step higher than the respective delegated authority as
applicable for the client as per para 4.7.4.
4.7.2.3. While approving waiver, the approving authority may also
stipulate obtaining collaterals specifically for unhedged
foreign currency exposure i.e. collaterals need not be
common for all limits.
4.7.2.4. The approving authority would also take into
consideration the customer’s ability to pass on their input
cost fluctuations to the market.
4.7.2.5. All such unhedged exposure should be priced for credit
risk premium as per internal credit rating as detailed in
this policy.
4.7.2.6. The clients, who have been approved waiver, should
undertake that –
4.7.2.6.1. It has the capability and financials to absorb the losses,
if any, arising out of unhedged exposure.
4.7.2.6.2. It will at appropriate time hedge its position to the
extent of 100% of UFCE progressively and if called upon
to
do,
will
arrange
to
furnish
acceptable
securities/margins/collaterals etc
4.7.2.6.3. Such undertaking is to be signed by the Director/Chief
Financial Officer/Finance Director/Partner or any
person who heads the Finance / Treasury operations.
4.7.3. For arriving at the INR equivalent of UFCE (B) for the purpose
of calculation of amount of delegation, FEDAI rate applicable
as on the last date of preceding month for the respective
foreign currency will be applicable.
9
4.7.4. Delegated authority for permitting waiver of booking
forward contracts or other derivatives with regard to UFCE
(B) is as follows
4.7.4.1. Delegation at Branch headed by AGM
UFCE (B) upto Rs 6 crores provided account falls within
delegated authority of Branch Head (AGM).
4.7.4.2.
Delegation at Regional Office headed by AGM
UFCE (B) upto Rs 10 crores provided account otherwise
falls within delegated authority of Regional Head (AGM) or
below.
4.7.4.3. Delegation at Branch headed by DGM
UFCE (B) upto Rs 15 crores provided account otherwise
falls within delegated authority of Branch Head (DGM).
4.7.4.4. Delegation at Regional Office headed by DGM
UFCE (B) upto Rs 20 crores provided account otherwise
falls within delegated authority of Regional Head (DGM) or
below.
4.7.4.5. Delegation at FGMO.
UFCE (B) upto Rs 50 crores provided account otherwise
falls within delegated authority of FGMO or below
4.7.4.6. Delegation at CAC-II
UFCE (B) more than Rs 50 crores to Rs 100 crores provided
account otherwise falls within delegated authority of CACII or below.
4.7.4.7. Delegation at CAC-I
UFCE(B) more than Rs 100 crores to Rs 400 crores provided
otherwise falls within delegated authority of CAC-I or
below.
4.7.4.8. Delegated authority for permitting waiver of booking
forward contracts or other derivatives with regard to UFCE
(B) more than Rs 400 crores, rests with MCM.
4.7.5.
Monitoring of Unhedged foreign exchange exposures of
the customer for which waiver of booking forward
contract has been granted
4.7.5.1. Customers who are not hedging their foreign currency
exposures can incur significant losses due to exchange rate
movements. These losses may reduce their capacity to
service the loans taken from us.
10
4.7.5.2. Thus, to monitor unhedged position effectively, it is
required that branches monitor on a monthly basis foreign
exchange exposures of the customer for which waiver of
booking forward cover has been granted. If there is
adverse movement in exchange rates of more than 5%,
branches are advised to obtain collateral/cash margin
against such exchange rate movements.
4.7.6.
4.7.6.1.
SANCTION/REVIEW/RENEWAL OF LIMITS
Details of UFCE, out of which UFCE(B) to be commented
upon invariably in each sanction/ renewal / review / ad-hoc
proposals and also evaluation of risk
arising out of such
unhedged foreign currency exposure of the corporate/firms
should be commented upon, to take suitable decision
regarding permitting waiver.
4.7.6.2. The sanctioning authority would take a proper view of risk
arising out of such unhedged exposure while determining the
terms and conditions for continuance of the credit limits and
may also consider stipulating cash collateral/ additional
securities, margins etc, depending on the customers’ ability
to withstand the loss, if any. The competent authority may
also consider withdrawing of existing approved waivers.
4.7.6.3. Where the unhedged exposure is relatively large in relation
to the net worth of the corporate and the competent
authority has not considered waiver/continuation of
unhedged foreign exposures, the customer should be advised
to hedge the exposure immediately.
4.7.6.4. Incorporation of the following table in proposals for
sanction/review/renewal of limits. It should be placed in
Executive Summary Format in Point no 24 (d) in the
Executive Summary. This table will inform us about the
submission of UFCE and EBID data by the client for necessary
computation of incremental provisioning and capital
requirements for every quarter end as mandated by RBI.
30th June
30th Sept
31st Dec
31st Mar
Amt
Amt
Amt
Amt
Date
of
submission
Date
of
submission
UFCE
Our share UFCE (B)
EBID
11
Date
of
submission
Date
of
submission
Cash
Margin
kept
exclusively
for UFCE
Likely
Loss/EBID
(%)
5. CREDIT RATING AND LOAN PRICING
5.1.
As per RBI guidelines, banks should ensure that the risk of
UFCE is effectively incorporated in their internal credit rating
system and ensure that their loan pricing policies adequate
reflect overall credit risks.
5.2.
The details of unhedged exposure out of the total foreign
currency exposure and evaluation of risk arising out of such
unhedged foreign currency exposure of the corporate/firm
needs to be commented upon while processing/sanctioning
new proposals/renewals/review/ad-hoc proposals for fund
based and non-fund based credit facilities.
5.3.
Presently, our bank has adopted 13 asset class wise CRISIL
rating models for corporate asset class with exposure above
Rs. 5 Crs. Out of the 13 asset class models, the management
of forex risk parameter is captured in Large Corporate, SME
(Manufacturing), SME (Service) and Trader models. However,
this parameter is not captured in all other 9 asset class CRISIL
models (Real Estate Model, 4 Infrastructure models (Power,
Port, Road & Telecom), NBFC, Banking Model, contractor and
broker model.
5.4.
CRISIL rating model is presently capturing only subjective
elements as outlined below without considering the extent of
UFCE :
Description
Score
Not subjected to any forex risk. Any such risks are totally hedged.
10
Not subjected to any significant forex risks. Hedging is used to
protect from risks related to forex fluctuations
Subjected to some forex risks but hedging used to mitigate any
substantial effects
Subjected to some unhedged forex risks
Subjected to significant forex risks that might be unhedged
Subjected to very high forex risk which is not hedged. There is no
focus on hedging the risk
5.5.
8
6
4
2
0
MODIFICATIONS RECOMMENDED IN ABOVE MENTIONED CRISIL
RATING MODELS
12
5.5.1. The management of Forex Risk parameter is to be
considered for all customers, who have UFCE more than
USD 2.00 Mio as against existing parameter, which is
presently applicable to corporate, who are having exports
exceeding 40% of their sales.
5.5.2. With a view to make the management of Forex risk
parameter in a more objective manner by eliminating
subjective elements, change in parameters description
and the score there against are as under :
Description
Score
Not subjected to any forex risk. Any such risks are totally hedged or
10
percentage of UFCE to Total Foreign Currency Exposure is upto
10% or less
Hedge is used to protect from risks related forex fluctuation,
8
percentage of UFCE to Total Foreign Currency Exposure is more
than 10% and utpo 15%
Subjected to some forex risks but hedging used to mitigate any
6
substantial effects, percentage of UFCE to Total Foreign Currency
Exposure is more than 15% and upto 25%
Subjected to some unhedged forex risks, percentage of UFCE to
4
Total Foreign Currency Exposure is more than 25% and upto 50%
Subjected to significant forex risks that might be unhedged,
2
percentage of UFCE to Total Foreign Currency Exposure is more
than 50% and upto 60%
Subjected to very high forex risk which is not hedged. There is no
0
focus on hedging the risk, percentage of UFCE to Total Foreign
Currency Exposure is more than 60%.
5.5.3. Further changes in the model-wise parameters and
weightages for the management of forex risk parameter
for the different rating models are as under :
Sr
no
1
2.
3.
Model
Model Selection Criteria
Present
Unhedged
Parameter
Large Corporate Borrowers
with Available
Model
exposure above Rs 25
crs
or
turnover/Revenue
above Rs 100 crs
SME
Borrowers engaged in Available
(Manufacturing)
manufacturing activity
with exposure upto Rs
25
crs
or
Turnover/revenue upto
Rs 100 crs
SME (Services)
Borrowers engaged in Available
service sector with
13
Suggested
changes in
Unhedged
Parameter
Present
Wts
Suggest
ed
Wts
No
change
4.44%
No
change
No
change
1.25%
No
change
No
change
1.25%
No
change
4.
5
6
7
8
9
10
11
12
exposure upto Rs 25 crs
or
Turnover/revenue
upto Rs 100 crs
Traders
Borrowers engaged in
service sector with
exposures upto Rs 25
crs
or
Turnover/revenue upto
Rs 100 crs
Contractor
Borrowers engaged in
contract
business
activity with exposure
upto Rs 25 crs or
Turnover/revenue upto
Rs 100 crs
Real
Estate Real Estate Developers
Developers
model to be used
irrespective
of
exposure and turnover
as it is to be treated as
a separate asset class
under
real
estate
development segment
Banks
Organisation engaged
in banking activities
NBFCs
This model should be
used to assess non
banking
financial
companies
Brokers
This model should be
used to assess capital
market brokers
Infrastructure
This model should be
(Power)
used to assess Power
projects, which fall
under project finance
Infrastructure lending.
This is used when an
SPV is formed to
manage the project
Infrastructure
This model should be
(Roads
& used to assess Road and
Bridges)
Bridges projects, which
fall
under
project
finance Infrastructure
lending. This is used
when an SPV is formed
to manage the project
Infrastructure
This model should be
(Port)
used to assess port
14
Available
No
change
1.25%
No
change
Unavailable
No
change
NA
No
change
Unavailable
Available
NA
2.5%
Unavailable
No
change
No
change
NA
No
change
No
change
Unavailable
No
change
NA
No
change
Unavailable
Available
NA
3.84%
Unavailable
Available
NA
3.2%
Unavailable
Available
NA
3.84%
Unavailable
NA
13
Infrastructure
(Telecom )
projects, which fall
under project finance
Infrastructure lending.
This is used when an
SPV is formed to
manage the project
This model should be Unavailable
used to assess Telecom
projects, which fall
under project finance
Infrastructure lending.
This is used when an
SPV is formed to
manage the project
Available
NA
5.6. ADDITIONAL PRICING FRAMEWORK
5.6.1. The customers who do not hedge their foreign currency
exposures can incur significant losses due to exchange rate
movements. Above rating models, do not capture effect
of exchange rate movements on likely reduction in profit
of the entity.
5.6.2. The weightage prescribed on the unhedged foreign
currency exposure is in the range of 1.25% to 4.44% out of
100%. Therefore, the marginal score will not materially
affect rating grade except those cases where the borrower
has been assigned higher rating grade based on marginal
score.
5.6.3. The Bank is required to provide additional provisioning and
also additional capital based on likely loss to the
customers on account of foreign exchange rate movements
with reference to UFCE.
5.6.4. Therefore, besides change in rating models as detailed
in para 5.5, based on the likely loss arising out of UFCE,
additional interest is recommended as follows :
Likely
Loss/EBID
(%)
Upto 10 percent
Additional Rate of Interest
More than 10 percent
and upto 30 percent
0 bps- if cash margin is 100% or more of fund based exposure
10 bps- if cash margin is 50% or more of fund based exposure
15 bps- if cash margin is less than 50% of fund based exposure
25 bps- no cash margin
More than 30 percent
and upto 50 percent
15 bps30 bps35 bps45 bps-
0 bps
if cash margin is 100% or more of fund based exposure
if cash margin is 50% or more of fund based exposure
if cash margin is less than 50% of fund based exposure
no cash margin
15
2.8%
More than 50 percent
and upto 75 percent
20 bps50 bps55 bps65 bps-
if cash margin is 100% or more of fund based exposure
if cash margin is 50% or more of fund based exposure
if cash margin is less than 50% of fund based exposure
no cash margin
More than 75 percent
30 bps- if cash margin is 100% or more of fund based exposure
70 bps- if cash margin is 50% or more of fund based exposure
85 bps- if cash margin is less than 50% of fund based exposure
110 bps- no cash margin
Waiver/Concession in interest arising out of above shall be
considered by the authority one step higher than the respective
credit sanctioning authority. The sanctioning authority will take
into consideration the following factors.
5.6.4.1. Past Track record of the client, Turnover of the
client, Risk Management Policy of the client,
presence
of
Independent
Treasury
to
monitor/control/manage their foreign exchange
risk,
5.6.4.2. Internal credit rating of the client is preferably CR 4
and above
5.6.4.3. The sanctioning authority may also stipulate
obtaining collaterals/cash margin specifically for
unhedged foreign currency exposure i.e collaterals
need not be common for all limits.
5.6.5. How to estimate the extent of likely loss:
5.6.5.1. The loss to the corporate in case of movement in USDINR exchange rate may be calculated using the
annualized volatilities. For this purpose, largest annual
volatility seen in the USD-INR rates during the period of
last 10 years may be taken as the movement of the USDINR rate in the adverse direction. RBI mandated Foreign
Exchange Dealers’ Association of India (FEDAI) to publish
the USD-INR annual volatility which is to be used for
computation of likely loss. FEDAI has thus computed the
same and informed the largest USD/INR annual volatility
in the last 10 years as 12.49% vide their Misc Circular No
37/2014 dtd 27.06.2014.
5.6.5.1. The largest annual volatility computed would be used
for the computation of the likely loss by multiplying it
with unhedged foreign currency exposure of the
corporate entity.
5.6.5.2. Information on UFCE may be obtained from entities on a
quarterly basis on self-certification basis, preferably
certified by internal auditor. However, the UFCE
information should be audited and certified by the
Statutory Auditors of the Company/Firm on an annual
16
basis.
In
case
of
exposures
of
overseas
branches/subsidiaries of the companies, the e
requirement of statutory audit may not be insisted
upon, to start with.
5.6.6. How to estimate the riskiness of UFCE
5.6.6.1. Once the loss figure is calculated, it must be
compared with the annual EBID as per the latest
annual or quarterly P &L account certified by the
Statutory Auditors. In case the audited EBID in
respect of Private/Unlisted Cos are not available,
their latest audited quarterly or yearly results
available have to be used. The yearly EBID figure used
should at least be of the last financial year.
5.6.6.2. As per RBI guidelines, definition of EBID is the same as
defined for computation of DSCR (Debt Service
Coverage Ratio) i.e. Profit after tax plus depreciation
plus interest on debt plus lease rentals, if any.
5.6.6.3. This loss may be computed as a percentage of EBID.
Higher this percentage, higher will be the
susceptibility of the corporate to adverse exchange
rate movements. Therefore, he should be charged
more rate of interest.
5.6.7. As stated above, the competent authority while approving
waiver for UFCE (B), may stipulate obtaining cash
margin/securities/collaterals. Therefore, wherever the
branches have obtained cash margin, specifically for
UFCE(B), it will be factored for arriving at additional rate of
interest as stated in table under para 5.6.4
5.6.8.
The customer is required to submit details of UFCE and
EBID as explained in para 5.6.5.2 & 5.6.6.1 within 7 days
from the close of the relevant quarter.
5.6.9. If customer does not submit the details of UFCE in the
prescribed format as per Annexure-II (for 5 years, per year
separate sheet) within 7 days from the close of the relevant
quarter, he will be charged maximum additional rate of
interest i.e. 100 bps.
17
5.6.10. Charging of additional interest is being explained through
the following examples :
Corporate
UFCE
(Rs. Cr)
EBID
(Rs. Cr)
Likely
Likely Loss
loss
at as % of
12.49%
EBID
volatility
(Rs. Cr)
Cash Margin
as % of Fund
Based
Exposure
Additional rate
of interest to be
charged as per
para 5.6.4
1
2
3
7
30.00
20.00
5=(4)/(3)*1
00
18.75%
6
A
4=(2)*
12.49%)
3.75
40%
15 bps
B
C
D
E
20.00
50.00
70.00
80.00
40.00
30.00
20.00
10.00
2.50
6.25
8.74
9.99
6.25%
20.83%
43.70%
99.90%
50%
20%
nil
40%
0 bps
15 bps
45 bps
85 bps
6.
INCREMENTAL
CAPITAL
AND
PROVISIONING
REQUIREMENTS FOR EXPOSURES TO ENTITIES WITH
UNHEDGED FOREIGN CURRENCY EXPOSURES
6.1. Incremental Provisioning requirement
6.1.1. RBI
vide
its
circular
No.
RBI/2013-14/448
DBOD.NO.bp.bc.85/21.06.200/2013-14
dated
15th
January,2014 issued guidelines for introducing incremental
provisioning for bank exposures to entities with UFCE.
6.1.2. For calculating the incremental provisioning the following
methodology to be followed :
6.1.2.1. Calculate UFCE as detailed in para 3.
6.1.2.2. Estimate the extent of likely loss as detailed in para
5.6.5
6.1.2.3. Estimate the riskiness of unheged position as
detailed in para 5.6.6.
6.1.2.4. Make provisions as follows :
Likely
(%)
Loss/EBID Incremental
Provisioning
Requirement on the total credit
exposures(whether
in
foreign
currency or in INR) over and above
extant standard asset provisioning
Upto 15 percent
0 bps
More than 15 percent and upto
20 bps
30 percent
More than 30 percent and upto
40 bps
50 percent
18
More than 50 percent and upto
75 percent
More than 75 percent
60 bps
80 bps
6.1.3. RBI has advised that incremental provisioning for UFCE
should be based on the exposure amount which is used for
computing standard asset provisioning
6.2. Incremental Capital Requirement
6.2.1. In addition to incremental provisioning requirements as
detailed in para 5 above, the Bank is required to additional
capital also as mentioned below :
Likely Loss/EBID Incremental Capital requirement
(%)
More
than
75 25% increase in the risk weight
percent
6.2.2. If the likely loss to EBID is upto 75%, then it attracts only
incremental provisioning and does not require additional
capital charge for the unhedged foreign currency
exposure. On the other hand, if the likely loss to EBID is
more than 75%, then both incremental provisioning and
incremental capital is to be provided for the same.
6.2.3. RBI has indicated that in cases where likely loss/EBID is
more than 75 %, entities are most likely to default on
account of high unhedged exposures due to volatility in the
USD-INR rate.
6.2.4. RBI has advised that incremental capital requirements for
UFCE should be based on the exposure amount which is
used for computing credit risk capital requirements.
6.3.
The guidelines are applicable to all entities on which the bank
has taken credit exposure. RBI has clarified that Inter-bank
exposures may be excluded from the ambit of the UFCE
guidelines.
6.4.
The guidelines are applicable to all entities irrespective of the
size of the entity. Computation of incremental capital and
provisioning requirements on a quarterly basis for smaller
entities will be operationally cumbersome. In this context, RBI
has clarified, that for exposures to smaller entities which are
having unhedged foreign currency exposure, banks have the
option of following a standardized method which would
require an incremental provisioning of 10 bps over and above
extant standard asset provisioning.
19
6.5.
Thus, as we would follow this standardized method for smaller
entities will not be required to get UFCE data from these
entities and therefore will not be required to compute
incremental capital and provisioning based on likely loss as a
percentage of EBID in respect of these smaller entities. RBI
further clarified that smaller entities are those entities on
which total exposure of the banking system is at Rs 25 crores
or less. Thus, for customers having UFCE with total funded
exposures of more than Rs 25 crores, bank will have to
compute account wise incremental provisioning based on
likely loss as a percentage of EBID.
7. OTHER MATTERS
7.1.
Project under implementation and new entities
7.1.1. The implementation of these guidelines may pose some
issues for exposures to project under implementation and
to new entities, which may not have annual EBID figure
available. The calculation of incremental provisioning and
capital requirements for projects under implementation
will be based on projected average EBID for three years
from the date of commencement of commercial operations
and incremental capital and provisioning should be
accordingly computed subject to a minimum floor of 20
bps of provisioning requirements. For new entities also,
the same frame work may be made applicable.
7.1.2. In such cases, additional interest as stated in para 5.6.4
will be applicable, subject to minimum floor of 25 bps
additional interest.
7.2.
Foreign MNCs(i.e. MNCs incorporated outside India)
7.2.1. While computing the UFCE of the foreign MNCs (i.e. MNCs
incorporated outside India) intra-group foreign currency
exposures (e.g. a subsidiary of a foreign MNC in India may
have borrowed from its parent) may be excluded if the
Bank is satisfied that such foreign currency exposures are
appropriate hedged or managed robustly by the parent.
Such justification to be properly documented.
7.2.2. In such cases, additional interest as stated in para 5.6.4
will not be applicable to such Foreign MNCs.
7.3.
Applicability to Foreign branches and Foreign Subsidiaries
7.3.1. These guidelines have been framed keeping in view the
domestic borrowers’ vulnerability to the foreign currency
exposures. However, currency induced credit risk may
20
also be considered for exposures of Foreign Branches and
Foreign subsidiaries.
7.3.2. Therefore, these guidelines will also be applicable Bank’s
Foreign Branches and also to subsidiaries.
For
operationalising these guidelines in case of exposures of
foreign branches and foreign subsidiaries of the Bank, INR
should be replaced by the domestic currency of that
jurisdiction.
7.4.
Bank to disclose its policies to manage currency induced
credit risk as a part of financial statements certified by
Statutory Auditors. In addition, Bank should also disclose the
incremental provisioning and capital held by Bank towards this
risk.
7.5.
The quantification of currency induced credit risk must form
part of bank’s ICAAP (Internal Capital Adequacy Assessment
Programme) and the same will be covered in the ICAAP
framework.
There are cases where interest concession is being sanctioned
to the borrowers. While approving interest concession, the
additional interest arising out of the above regulatory
requirements need to be considered.
7.6.
7.7.
For the sake of clarity, it is clarified that guidelines detailed
in para 4 are on UFCE (B) ie customers Unhedged Foreign
Currency Exposure towards our Bank and delegated authority
for permitting waiver for booking forward contracts or
options. There should not be any UFCE (B) without approval
by competent authority as detailed in para 4.
7.8.
Guidelines detailed in paras 5, 6 and 7.1 to 7.4 are in relation
to UFCE i.e. customers Unhedged Foreign Currency Exposures
from all sources including obligations towards our bank.
These paras give details of charging of additional interest,
incremental provision and increment capital requirement in
relation to UFCE.
8. PROCEDURE OF GETTING DETAILS OF UFCE & EBID FROM
THE CUSTOMERS
8.1.
As per RBI guidelines, all exposures (whether in foreign
currency or in INR) to the entities who has UFCE would attract
additional standard asset provision and additional capital
provision. Thus effectively, even though our Bank may not
have UFCE (B) on the particular customer, but if he has UCFE,
our Bank needs to provide for additional standard asset
provisioning and additional capital for exposure with us that
may be of INR only. For example, if a customer A has UFCE of
21
USD 10 Mio, but he enjoys only INR limits of Rs. 10 Crs with
our Bank, we would have to provide for additional standard
asset provision and additional capital requirement depending
upon the bracket it falls in for our exposure of Rs. 10 Crs. If
on account UFCE exposure, there is likely loss to the
customer, which is more than 75% of his EBID, then our Bank
needs to provide standard asset provision at additional 80 bps
and 25% increase in risk weight. Each bank that is having
exposure on the said customer will provide incremental
provision and additional capital, depending on its exposure to
the concerned clients.
8.2. Therefore, it is very crucial to get UFCE information from the
customers.
8.3. The Bank shall put all customers on notice, who as per
knowledge of the bank have Foreign Currency obligations to
the Bank/s/Financial Institutions.
8.4. They will be advised to furnish details of UFCE as per
Annexure II (for 5 years, per year separate sheet) and also the
annualized EBID as explained in para 5.6.5.2 and 5.6.6.1.
8.5. On receipt of these details from customers, they will be
captured in Finacle. Necessary Menu has been provided in
Finacle to capture details customer-wise as follows :
8.5.1. Customer ID
8.5.2. UFCE
8.5.3. EBID
8.5.4. Cash Margin (kept exclusively for UFCE)
8.5.5. Independent Treasury (Y/N)
8.6.
8.7.
8.8.
9.
Annual volatility as computed by FEDAI will be utilized for
computation of incremental provisioning and capital
requirements. This will be uniform for all accounts.
On capturing variables as per para 8.5 and 8.6, with the help
of financial data captured in Finacle, DFB & IBD will calculate
incremental provision for exposures to entities with UFCE and
Risk Management Department will compute incremental
capital requirements every quarter.
Based on this information, additional interest will also be
charged to the customers as per para 5.6.4.
MONITORING
9.1.
The branches will submit a monthly report to DFB&IBD, giving
details of unhedged exposure of the clients, in whose favor
the waiver is approved, before 15th day of subsequent month.
9.2.
DFB&IBD will place a report on UFCE on quarterly basis to the
Board along with details of incremental provision for
exposures to entities with UFCE.
22
9.3.
Reporting for Regulatory Purposes
Quarterly statement of unhedged exposure of Foreign Currency
Loans including ECBs/ FCCBs / Buyers credit etc. for USD 25
mn and above to be submitted by the branches to the General
Manager, DFB&IBD for onward submission to RBI.
9.4.
Monitoring unhedged Foreign Currency Exposure in case of
Consortium Lending or Multiple Banking Arrangements
9.4.1.
Consortium Banking
In case of Consortium Lending, deliberation on unhedged
exposure will be one of the Agenda items of consortium
meetings and the client will be impressed upon to
suitably undertake hedging transactions for covering
unhedged exposure. Information of unhedged exposure as
mentioned in paras 8.5 and 8.6 will be shared with other
participating banks for monitoring. It will be ensured
that details provided by the customer are similar with all
consortium member banks. Any variation therein to be
taken up with the customer.
9.4.2. Multiple Banking
In case of multiple banking arrangements, the lead role
in monitoring the unhedged foreign exchange exposure of
the clients as stated herein would have to be assumed by
the bank, which is having the largest exposure. If our
Bank is having such largest exposure, our Bank will
assume such role.
The branch will share information unhedged exposure
with other banks for monitoring thereof and also impress
upon the client in co-ordination with largest exposure
taking bank to suitably undertake hedging transactions
for covering unhedged exposure. It will be ensured that
details provided by the customer are similar with all
consortium member banks. Any variation therein to be
taken up with the customer.
10. Compliance with Statutory/Regulatory requirements
The Bank will comply with all home and host statutory and
regulatory requirements while undertaking the transactions under
the scope of the policy.
11. REVIEW
This policy shall be valid for the financial year 2014-15 and its
continuity may be extended for a further period not exceeding six
months with the specific approval of CMD.
23
Annexure-II
(This sheet to be prepared for 5 years, each year separate sheet)
A/c
Branch
UNHEDGED FOREIGN CURRENCY EXPOSURES FROM ALL SOURCES
POSITION AS OF
Sr.
Details
Amount in
N
USD Mio
o
A
Calculation of Total Foreign Currency
Exposure from all sources
1
Exposure/Loan availed from Union Bank of
India
1.1
Foreign Currency Loan (carved out of Rupee
working capital)
1.2
Foreign Currency Term Loan (carved out of
Rupee Term Loan)
1.3
External Commercial Borrowing (ECB)
1.4
Import LC accepted but not yet paid
1.5
Letter of Comfort issued for availing Buyers
Credit
Sub-total (A)
2
Exposure/Loan availed from Other Banks
2.1
Foreign Currency Loan (carved out of Rupee
working capital)
2.2
Foreign Currency Term Loan (carved out of
Rupee Term Loan)
2.3
External Commercial Borrowing (ECB)
2.4
Import LC accepted but not yet paid
2.5
Letter of Comfort issued for availing Buyers
Credit
Sub-Total (1+2)
B
Non-Trade related exposure
3.1
O/s Foreign Currency Convertible Bonds (FCCB)
issued
3.2
Medium Term Note (MTN) issued
3.3
Plain Vanilla Bonds issued
3.4
Any other forex debt instrument issued
Sub-Total (of B)
4
TOTAL FC EXPOSURE FROM ALL SOURCES
(A+B)
5
5.1
Hedging available
Export Receivables/Natural hedge (not to
include the following)
5.1.1 Bills which are already discounted with
Bank/s
5.1.2 Forward Contracts/Options booked for
Export Receivables)
24
5.2
5.3
7
Economic Hedge
Forward Contracts/Plain vanilla options
booked for obligations where currency
pair is USD /INR i.e. Financial hedge
EEFC
Sub-Total
Cross currency Forward Contracts without INR
leg
Foreign Currency Payable
Foreign Currency Receivable
Sub-Total (6.2 minus 6.1)
TOTAL HEDGING (5+6)
8
TOTAL UNHEDGED POSITION i.e UFCE (4-7)
5.4
6
6.1
6.2
25