The Reserve Bank of India (RBI) advised banks to encourage large agricultural borrowers such as agricultural commodity processors, traders, millers, aggregators, etc., to hedge their risks related to agricultural commodity prices.

Banks provide a number of credit facilities to customers engaged in activities related to agriculture. "Volatility in agricultural commodity prices may negatively impact such borrowers and the banks. Hence, hedging of agri-commodity price risk will be beneficial to both the borrowers and the banks," the central bank opined.

At present, a number of hedging tools, including derivatives, are available in the Indian market. However, these tools are not being used extensively due to lack of awareness of the products or due to perceived complexity of these products, the RBI said.

The Reserve Bank has, therefore, advised banks to educate their customers about the suitability and appropriateness of using various hedging tools so that they can take an informed decision. "This will also reduce the scope of mis-selling of derivatives. Banks have to keep the sophistication, understanding, scale of operation and requirements of their agri-borrowers in mind while advising them on the availability and use of these instruments."