Excessive reliance on forex borrowing risky for companies, says H R Khan

Says heightened volatility makes debt rollovers difficult or at high interest rates

The Reserve Bank of India (RBI) said excessive reliance on foreign currency funds could pose a balance sheet risk for Indian companies when there is fluctuation in the currency markets.

“Heightened volatility makes the debt rollovers difficult or at high interest rates,” said RBI’s Deputy Governor H R Khan, who was speaking at the Bankers’ Club at Thiruvananthapuram on Monday. A copy of Khan’s presentation was uploaded on the RBI website on Tuesday. Indian companies’ foreign borrowings have gone up sharply due to availability of funds at cheap rates.

High unhedged exposure poses risk as the rupee has weakened significantly in months.

The currency has depreciated 8.5 per cent against the dollar since the start of April.

The central bank has been voicing concern over the unhedged foreign exposure of India Inc. It has asked banks to put in place a mechanism to rigorously evaluate the risks arising out of unhedged foreign currency exposure of companies and price these in the credit risk premium. Banks were also advised to stipulate a limit on the unhedged positions of companies on the basis of banks’ board-approved policy. Only about 40 per cent of Indian companies’ exposure are hedged.

In the annual policy review last month, RBI had said the high current account deficit, along with weakening external sector parameters, the stressed fiscal situation and increasing corporate leverage, especially external commercial borrowing with unhedged exposures, were identified as other challenges to macro economic stability.