A textile company earns only in rupees but has USD 60 million of loans. Stress a 15% fall in the rupee and show what happens to its debt, interest cover and leverage from the lender's side.

A 15% rupee fall lifts Ambrosil's debt from Rs 504 crore to Rs 579.6 crore with no change in its earnings. Interest cover drops from 2.55x to 2.22x and leverage rises from 5.6x to 6.44x, breaching a 6.0x covenant. The currency risk Ambrosil did not hedge has become the lender's credit risk. Price it, require a hedging policy and size limits on the stressed numbers.

Imagine a family that earns in rupees and takes a car loan in dollars because the rate looked cheaper. The monthly dollar instalment never changes, but if the rupee falls, every instalment costs more rupees from the same salary. A borrower whose debt and income are in different currencies has turned an exchange-rate move into a change in how much it owes. The lender feels it first, because its ratios are measured in rupees.

Before: USD 60 million at Rs 84 is Rs 504 crore. Interest at 7% is Rs 35.28 crore, so cover is 90 over 35.28, 2.55x, and leverage is 504 over 90, 5.6x. After a 15% fall the rupee is at Rs 96.6. Debt becomes Rs 579.6 crore, interest Rs 40.57 crore, cover 2.22x and leverage 6.44x. Nothing about the yarn business changed.

First, recognise the loss. The Rs 75.6 crore increase in debt is 84% of a year's EBITDA, lost in one move without a single bad sale. Second, combine stresses: currency falls often arrive with slower demand, and the joint case is the one to size limits on. Third, act on the structure: price the loan for the unhedged foreign currency exposureDebt or payments in a foreign currency that a borrower has not offset with foreign income or hedges, so a currency move changes what it owes., require a board-approved hedging policy with a minimum hedge ratio, and put the covenant test on a hedged basis.

Regulators in several markets, India included, ask banks to track borrowers' unhedged currency exposure and hold more against it; confirm the current framework before quoting any number. Close with the limit of the stress: a 15% move is a scenario, not a forecast, and a principal repayment falling due while the rupee is weak would turn a ratio problem into a cash problem.