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SMEs not getting fair rates for hedging deals: RBI

Tags: SMEs, G Padmanabhan, RBI, hedging deals, corporate, banks. instability, rupee

August 21, 2012 | COMMENTS ( 0 )

SMEs not getting fair rates for hedging deals: RBI

RBI’s executive director, G Padmanabhan expressing concern over hedging transactions of SMEs has said that the units are not getting fair rates for their hedging deals. He even reprimanded India Inc. for not using hedging tools wisely in their business instead for their own profits. Padmanabhan was speaking at the Annual Forex Assembly of the Forex Association of India in Goa.

Padmanabhan stated that SMEs felt that they were faced with a 'rip-off', as a large number of SME customers in this country were not getting fair rates for their hedging transactions. He added that banks should offer finer rates to SME clients for hedging transactions.

“The banks’ responsibility to ensure appropriateness of the product for the client is not merely to satisfy a regulatory mandate nor is it motivated by altruism. Foreign exchange business in India is a part of relationship banking and it is in the banks’ interest that clients do not end up taking unwarranted risk through ill-understood and inappropriate hedging products,” Padmanabhan said.

He came down hard on the corporate sector for using hedging instruments to trigger instability in the market.

“Hedging instruments have become weapons in the hands of corporates to trigger market instability,” he said adding that these instruments had been used by corporates for their own profits rather than to manage their business. He said that the companies had complacent regarding the rupee’s stability, particularly during 2009-2011 when the Indian currency was range-bound between Rs 44-46 a dollar.

Explaning this attitude towards the rupee levels, he added, “A good bit of sales talk from various analysts (and some bankers, too) convinced then that hedging is an unwarranted cost imposed on the business when the rupee is so well-behaved. It is like saying that life insurance is of no value since you are alive today,” he added.

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