Bonds, Currencies & Commodities
RBI asks banks to evaluate unhedged foreign currency risks

RBI said unhedged forex exposure of corporates is a source of risk to the corporates as well as to the financing bank and the financial system

Mumbai: The Reserve Bank of India (RBI) has asked banks to put in place a mechanism to rigorously evaluate the risks arising out of unhedged foreign currency exposure of corporates and price them in the credit risk premium, reports PTI.

 

It also advised banks to furnish compliance and action taken reports on the subject before end-December 2012.

 

In a notification, RBI said unhedged forex exposure risks are not being evaluated rigorously and built into pricing of credit despite instructions.

 

"It is emphasised that unhedged forex exposure of corporates is a source of risk to the corporates as well as to the financing bank and the financial system," it said.

 

It further said a large unhedged forex exposures of corporates have resulted in some accounts turning non-performing.

 

"Banks are therefore advised that in accordance with the guidelines of February 2012 they should put in place a proper mechanism to rigorously evaluate the risks arising out of unhedged foreign currency exposure of corporates and price them in the credit risk premium," it said.

 

Banks should also consider stipulating a limit on the unhedged position of corporates on the basis of banks Board-approved policy, it said.

 

Banks are required to monitor the unhedged portion of forex exposure of the corporates whose total foreign currency exposure are high at above $25 million of its equivalent and extend loan above $10 million only on the basis of a well laid out policy.

 

Banks are also required to take into account their exposure from all sources including foreign currency borrowings and external commercial borrowings in case of consortium / multiple banking arrangements for arriving at aggregate unhedged foreign currency exposure of clients.

 

In a separate notification, RBI also asked banks to strictly adhere to the instructions regarding sharing of information relating to credit, derivatives and unhedged foreign currency exposures among themselves.

 

"Any sanction of fresh loans/ad hoc loans/renewal of loans to new/existing borrowers with effect from 1 January 2013 should be done only after obtaining/sharing necessary information," RBI said.

 

Banks would be liable to action in case of non-adherence to the instructions including imposition of penalty, RBI said.

 

It further asked them to put in place an effective mechanism for information sharing by 31 March 2012.

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ICICI Prudential Dividend Yield Equity: Another dividend yield fund

The new scheme from ICICI Prudential Mutual Fund has a mandate to invest in companies with high dividend yield. Will it?

Following the success of several dividend yield schemes over the last few years, ICICI Mutual Fund plans to launch a dividend yield scheme—ICICI Prudential Dividend Yield Equity Fund. This scheme will compete with seven other schemes present in this category. Similar to the other schemes, the scheme from ICICI Mutual Fund will invest 65% to 100% in stocks that offer ‘attractive’ dividend yield. According to the offer document filed with the Securities and Exchange Board of India (SEBI), the fund manager would endeavour to maintain the portfolio’s dividend yield higher than the prevailing dividend yield of the S&P CNX Nifty. The scheme would focus on identifying and investing in a basket of high dividend yield companies, which are expected to declare dividends on a consistent basis.
 

There have been a few dividend yield schemes that have done well with a performance as good as other equity diversified schemes in the last five years. Recently, India Infoline launched its index scheme based on the CNX Dividend Opportunities Index—IIFL Dividend Opportunities Index Fund. The performance of the scheme from ICICI Prudential MF too will be benchmarked to the CNX Dividend Opportunities Index. High dividend yield stocks are more likely to provide greater degree of protection to investors than other stocks in falling equity market. However, our recent analysis of dividend yield schemes (Dividend Yield Schemes: A better choice?) has shown that the stocks picked do not necessarily have a high dividend yield and the top 10 holdings are similar to those of other equity diversified schemes. Their performance in earlier periods has been inconsistent as well. A lot would depend on the stock picking skills of the fund manager. The scheme would be managed by Mrinal Singh who also manages ICICI Prudential Discovery Fund, one of the better performing mid-cap schemes.

Below is how some of the schemes with the same investment objective have performed in the past (arranged alphabetically):

ICICI Prudential Mutual Fund has put up a relatively good performance in the past. (Read: Best Fund Houses ) The fund house figures among the top 10 fund houses in all the categories. Even over a fixed period of one year, three years and five years, there have been just two instances where a scheme has underperformed the benchmark. (See table below).

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