MUMBAI (TIP): With an agrararian crisis looming over the country’s farm production, Reserve Bank of India has asked banks to ensure that borrowers engaged in activities related to agriculture are hedging agaist agri commodity price risk using derivatives.
Banks provide a number of credit facilities to customers engaged in activities related to agriculture. These include commodity processors, traders, millers and aggregators. “One of the prominent, albeit indirect, risks in this sector is that of volatility in agricultural commodity prices. Hedging of the agri-commodity price risk is beneficial to both the borrowers and the banks and, hence, it is desirable that a risk management culture is fostered amongst the stakeholders including agri-borrowers and banks,” RBI said in a circular.
RBI said that although various hedging tools, including derivatives, are available in the Indian market, these are not being used extensively due to lack of awareness and their inherent complexity.
“With a view to developing strong risk management capabilities to manage agri-commodity price risk, it is felt that banks should encourage hedging by the agri-borrowers by creating awareness amongst them regarding the utility and benefits of hedging through agri-commodity derivatives. At the same time, banks must keep the sophistication, understanding, scale of operation and requirements of their agri-borrower in mind while advising on the availability and use of these instruments,” the central bank said.