Comments
The Reserve Bank of India’s decision to discontinue issuance of LoU/Letter of Comfort (LoC) for trade credits for imports into India will impact small and medium enterprises. A number of SMEs are extremely dependent on LoUs for raising funding at a reasonable cost. These SMEs are involved in exports and are tier-1 suppliers to large corporates.
President of Small & Medium Business Development Chamber of India, Chandrakant Salunkhe said that banning of LoUs will severely impact the SME sector as it was an important credibility building option for the smaller players.
“Due to some big corporates who have cheated the banks, why should the SMEs suffer? The RBI should withdraw the LoU ban. Instead, it can insist on banking sector for creating a new compliance model to avoid frauds and allow LoU issuances to genuine borrowers,” he said.
According to industry estimates, around 25,000 small firms and 75,000 medium-sized firms will be affected by the ban. “The move is a blow to India's ambition of becoming a manufacturing hub. Small & Medium Business Development Chamber of India, will be taking the issue with the RBI,” Salunkhe said.
Shobana Kamineni, President, CII, said the RBI’s decision will have a disruptive impact on the buyers’ credit market, in the immediate term. “The traders who have been conducting business through these two instruments will now have to necessarily shift their transactions to Letters of Credit and Bank Guarantees. The result would be that cost of credit may go up, especially for the SMEs,” said Kamineni.
CII feels that RBI could have strengthened and tightened the existing regulations on LoUs and LoCs rather, or could have announced a phasing out mechanism, rather than completely discontinuing a legitimate and established product.
Cost of funds to go up
Nikunj Turakhia, President of Steel Users Federation of India, said the abrupt withdrawal of LoU and LoC by Reserve Bank of India will exert tremendous pressure on importers who have availed the facility as they have to shell out the entire money upfront. Normally, importers avail 90 days credit through LoU for which they are charged a margin at the rate of Libor (London Inter-bank Offered Rate) plus 1.5 – 2 per cent besides submitting sufficient collateral.
Sandeep Parikh, Vice-President, Chamber of Small Industry Association, said the small scale units will face liquidity crunch as payments from medium and large units will be delayed due to sudden cancellation of LoU. In all, about 10 per cent of the small scale units would be eligible and using the LoU facility as buyers credit, he said.
‘Not much impact’
According to exporters’ body FIEO, the discontinuation of Letter of Undertaking (LoU) and Letter of Comfort (LoC) by the RBI will not have much impact on trade as such instruments are being used by just about 5 per cent of importers.
Mostly large players in the gems and jewellery and metal and petroleum sectors use the two instruments, it added.
“Since most exporters are using Letter of Credit and Bank Guarantees, which are relatively safe, the move will not have much adverse bearing on exports. However, this may slightly increase the cost as such instruments are costlier by about 0.5-1 per cent,” FIEO President Ganesh Kumar Gupta said in an official release.
Comments
COMMENT NOW
Comments
Comments have to be in English, and in full sentences. They cannot be abusive or personal. Please abide by our community guidelines for posting your comments.
We have migrated to a new commenting platform. If you are already a registered user of TheHindu Businessline and logged in, you may continue to engage with our articles. If you do not have an account please register and login to post comments. Users can access their older comments by logging into their accounts on Vuukle.