Chemtrols, a Mumbai-based industrial equipment manufacturer catering to oil refineries and fertiliser companies, expects its turnover to fall to ₹250 crore this fiscal from ₹350 crore logged in 2016-17.

The decline in turnover is primarily due to the company’s business taking a hit following the ban imposed by the Reserve Bank of India on the issuance of letters of undertaking (LoUs).

K Nandakumar, Managing Director, Chemtrols Industries, says the cost of finance has gone up from 5 per cent to 13 per cent since the ban of LoUs.

‘Herculean task’

“Accessing bank finance has become a herculean task in the last two months just because two unscrupulous elements took the banking system for a ride.”

The company has to cut down on raw material sourcing as it has become a costly affair to pay upfront against the earlier practice of utilising LoUs for 180 days at a much lower rate, he explains.

Ahmedabad-based Raajratna Metal Industries, a manufacturer of stainless steel wires and reinforcement bars, also expects the ban on LoUs to affect its business.

BJ Sen, CFO of Raajratna Metal, said the the LoU ban has made it difficult for the company to get cheap foreign financing. Before the ban, the company could access foreign funds at 2.5 per cent per annum but today it has risen to 10 per cent.

Raajratna Metal used to get $5-10 million through the LoU route. “Today, the cost of these funds has risen by ₹3-6 crore. It is a challenge for companies in the import-export business to work without LoU comfort,” Sen said.

Knee-jerk reaction

Rajesh Mehta, Executive Chairman, Rajesh Exports, one of the largest jewellery exporters, said the knee-jerk reaction of the RBI has left scores of exporters in the lurch.

“The government has been saying that it is promoting ease of doing business in India, but the RBI move to ban LoUs will make doing business in India difficult,” he said.

Ganesh Kumar Gupta, Managing Director, Akash Textiles, and President, Federation of Indian Export Organisations, said when small exporters approach banks to borrow ₹5-10 crore they are asked several questions and are also told to submit collateral worth the loan amount.

Many fear that the ban could spell trouble for the companies next fiscal as banks have cut down on working capital sanction in February and March.

Drastic measure

Sharad Kumar Saraf, Chairman and Managing Director, Technocrat Industries, said banning LoUs is a drastic measure taken by the RBI. This has also led to higher scrutiny of all other instruments, such as standby letter of credit, which is issued by banks against the asset provided as guarantee.

Anil Goel, Managing Director, Duroshox, an auto-ancillary company, said the cost of funds has gone up as importers have to pay upfront but the company is exploring other financing avenues. “In simple terms, it is like walking with crutches,” he said.

Related Topics
comment COMMENT NOW