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The commodities trade regulator, the Forward Markets Commission (FMC), has started pitching with banks to promote commodity hedging on the exchange platform. It has begun doing so despite the government having had to remove the controversial clause allowing banks to participate in commodities futures from the Banking Regulation Amendment Bill, to secure its passage.
In the past two weeks, FMC has had meetings with market participants and stakeholders, with bankers invited. “We are asking bankers to understand the market and ask their borrowers to hedge themselves for their commodity exposure,” said Ramesh Abhishek, chairman, FMC.
Dilip Bhatia, chief executive of ACE Derivatives and Commodity Exchange, said: “Banks can even consider giving loans at better terms when the commodity risk is hedged and there can be lower interest rates and lower margins for such loans.”
In the case of loans to small and medium-size companies and traders, banks generally give loans against the collateral of stocks. However, given the risk profile of such clients, they keep higher margins compared to the value of the collateral, considering the probable price fall in the commodity and overall business risk. When the risk of price movement is locked in by hedging on the exchange platform, banks can consider better terms.
Banks are already giving loans to farmers against warehouse receipts (wherever such warehouses are recognised by the exchanges) and in most such cases, the goods have been hedged. When farmers deposit the commodity with the warehouse, they sell these in the futures market and, hence, the price of the commodity is locked in and the risk on this account is addressed. In this context, “Rubber is the ideal showcase of success in commodity futures,” said Abhishek.
The chief executive officer of another commodity exchange said, “Even analysts covering commodity companies should start asking the management if they have hedged their commodity risk and if yes, to what extent. There should also be accounting standards and proper provisioning norms for commodity hedging, as in the case of forex derivatives exposure.”
In the case of information technology companies, they declare the extent to which their foreign exchange revenues have been hedged and the banking regulator, the Reserve Bank of India, regularly tells companies to keep their positions hedged against forex exposure. For hedging commodity risks, the lack of options trading is a major hurdle. The lower level of liquidity in many commodities, lack of depth and absence of players with different perspectives in many commodities are other worries.