Following the RBI ban on letters of undertaking (LoUs), gems and jewellery businesses have been burning extra cash by turning to costlier funding options, such as letters of credit (LCs) or making payments upfront, thereby squeezing their liquidity further.

The RBI’s move, a fallout of the over $2-billion fraud at Punjab National Bank (PNB), has resulted in shortage of credit for the jewellery and diamond sector.

The sector normally undertakes high-value imports through instruments such as LoUs, where banks pay on behalf of the buyer.

“The cost of credit is going up. There are only two options left in lieu of LoUs. The first is letter of credit (LC), which is a bit costlier than the LoU. And the second option is to make immediate payment without availing credit altogether,” said Rajesh Mehta, Chairman, Rajesh Exports.

Charges on LCs are about 1 per cent more than on LoUs.

LoUs were the cheapest available credit finance even as LCs and bank guarantees were available as alternatives.

According to Mehta, the players who are dependent on bank credit for imports are the ones affected by the RBI step.

The RBI move has directly affected recognised trading agencies importing bullion (gold, silver), and has prompted them to look for alternative sources to fund their imports.

Industry players say that units that have less liquidity and limited cash will face the heat as they will have to turn to non-banking private funding sources to raise import credit.

However, according to traders, business remains largely unaffected even as cash-flows and money supply have taken a big hit.

“People like Nirav Modi misused such facilities and now the others are being restricted from using them. The trade has not been affected much but due to tightening of norms and squeezing of limit by banks, the liquidity issue is hurting a lot,” said Suresh Hundia, former president of Bombay Bullion Association.

The stakeholders in the gems and jewellery sector, represented by the All-India Gems and Jewellery Trade Federation, has taken up the LoU issue with the Indian Banks’ Association.

For high-value sector such as gems and jewellery, getting credit at competitive rates is crucial for its sustenance. Banks have shown reluctance to finance the imports of the sector and started demanding higher compliance in terms of high credit rating and 100 per cent collateral.

Gems and Jewellery Export Promotion Council (GJEPC) data show that during April 2017-February 2018 India imported gold bars worth ₹32,467.84 crore (up 24.5 per cent over the previous year), and rough diamonds worth around ₹1.10 lakh crore (up 6.60 per cent).

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