Of late few banks have started asking their clients to compulsorily book forwards against  their buyers credit exposure (existing as well new transactions). This change is because of earlier and current directives given by Reserve Bank of India (RBI). Summary of which is given below:

1. Second Quarter Review of Monetary Policy 2011-12 – Unhedged Foreign Currency Exposure of Corporate: Dated: 02-02-2012

Recent events relating to derivative trades have shown that excessive risk taking by corporates could lead to severe distress to them and large potential credit loss to their bankers in the event of sharp adverse movements in currencies. In view of the importance of prudent management of foreign exchange risk, it has been decided that banks, while extending fund based and non-fund based credit facilities to corporates, should rigorously evaluate the risks arising out of unhedged foreign currency exposure of the corporates and price them in the credit risk premium. Further, banks may also consider stipulating a limit on unhedged position of corporates on the basis of bank’s Board approved policy

2. Unhedged foreign exchange exposure of clients – Monitoring by banks (10th December 2008)

RBI Via December 2003 Circular, advised bank that they should have a policy which explicitly recognizes and takes into account risks arising on account of unhedged foreign exchange exposures of their clients. Banks were also advised that foreign currency loans above US $ 10 million, or such lower limits as may be deemed appropriate vis-a-vis the banks’ portfolios of such exposures, can be extended by banks only on the basis of a well laid out policy of their Boards with regard to hedging of such foreign currency loans.

Board policy of banks should cover unhedged foreign exchange exposure of all their clients including Small and Medium Enterprises (SMEs). Further, for arriving at the aggregate unhedged foreign exchange exposure of clients, their exposure from all sources including foreign currency borrowings and External Commercial Borrowings should be taken into account.

Reference

• Unhedged Foreign Currency Exposure of Corporates: Dated: 02-02-2012
• Unhedged Foreign Exchange Exposure of Client: Dated: 10-12-2008
• Recent Charges in Forward Contract Booking Norms: Dated: 15-12-2011
• Recent Charges in Forward Contract Booking Norms: Dated: 15-12-2011
• Comprehensive Guidelines on Over the counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity price and freight risk: Dated: 28-12-2010
• Comprehensive Guidelines on Derivatives (20-04-2007) – Suitability and Appropriateness Policy (Page no 8) as per Comprehensive Guidelines issued in 2010
• Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulation, 2000: Dated: 03-05-2000