With their loans at stake, banks have to do this
With the rupee depreciating around 6% over the last month, corporate balance sheets are under stress and though the loss is notional if the rupee reverses its fall, the central bank is right in insisting India Inc hedge its exposure as much as possible. According to a Bank of America-Merrill Lynch report, the FY14 EPS impact of a 5% fall in the rupee will be as much as 83.5% in the case of a Suzlon and 11% in the case of even a Bharti Airtel. For companies like Ashok Leyland where an EPS impact of 38.5% is estimated in FY14, foreign debt accounted for 41% of total debt at the end of FY12. If, going by RBI figures, just around half of corporate India’s forex exposure is hedged, that’s a big risk to be taking. More so given the rupee has been so volatile over the past few years and, given the fears over the withdrawal of the Fed’s stimulus programme, the rupee is in for a rough ride even though the rupee has retracted considerably since it almost touched 59 in intra-day trade on Wednesday.
It is in this context that RBI said that it was up to commercial banks to ensure their clients were hedging their positions. SBI chairman Pratip Chaudhuri’s position that this is the central bank’s responsibility misses the point. While Chaudhuri says RBI should ask companies to put in place proper hedges when it sanctions foreign currency borrowings, it is the commercial banks who monitor the corporates on a daily basis and who are, therefore, in the best position to ensure the hedges are in place. In any case, if the companies don’t hedge their positions, it is the commercial bank loans that are in danger of going bad. Indeed, it is surprising that RBI needed to even make this statement and ask bankers not to give additional limits to firms if forex hedges were not place. You would think this would be prudent banking practice, insisted upon by individual banks as well as the lead banks in the case of consortium lending. It is equally curious that the chairman of India’s largest banks should feel he is a helpless spectator. In the case of NTPC’s overseas bond, he has said, very few of the domestic banks participated—but surely NTPC could have been told it could not raise a bond if the local banks didn’t agree? Companies who take loans from banks cannot be allowed, to use the SBI chief’s words, to tell banks not to “get into my kitchen”. The large quantums of corporate loan restructuring—around R77,000 crore in FY13—make it incumbent upon banks to assert themselves. But, given the large NPA problem, the RBI also needs to take some action—relooking the norms on how much of their capital banks can lend to single firms/groups is one of them; it has already raised provisioning norms for restructured loans to ensure banks have more skin in the game.