Exporters seek govt help for Iraq performance bond guarantees

Written by Arun S | New Delhi | Updated: Aug 19 2013, 16:46pm hrs
Even as the government is giving incentives to exporters on non-conventional markets to offset the impact of the slump in the US and EU, major export houses have urged the finance ministry and RBI to ask banks to help them bag lucrative project export contracts in Iraq and Jordan.

The Department of Financial Services in the finance ministry as well as the RBI are looking into a representation sent by the Engineering Export Promotion Council (EEPC India) saying bidding for many project export contracts in Iraq were refused performance bond guarantees by many public sector banks.

On the other hand, several companies from the US, China and even the European Union are aggressively bidding for these contracts in Iraq and winning them, the sources said.

According to the prevailing norms, contractors participating in such project export bids are required to give a performance bond guarantee, which is a certain percentage such as 5-10% of the total contract amount.

This guarantee is secured by the contractor from his banker. The bank can provide the guarantee favouring an Iraqi bank, which then issues the guarantee favouring the Iraqi government agency or any other beneficiary there. The bond amount is usually released once the contractor gets a certificate stating that he has delivered as promised.

In this particular case, the Indian project exporter was even "encouraged" by the Indian embassy in Baghdad to "seriously pursue" such opportunities, sources said. However, the sources added that some PSBs declined to issue the guarantees citing certain internal circulars by the RBI that had banned them from issuing such guarantees, while others rejected the request saying that they did not have "correspondent Iraqi bankers".

This, despite the exporter willing to give "100% security in addition to the bank charges".

The exporting company said it later learnt that though the RBI document advises Indian banks against discounting only letters of credit and other similar instruments issued by banks from certain countries including Iraq, banks have cited it to avoid "all exposures" to those countries.

Even in the case of Jordan, it is becoming very difficult to get such performance bond guarantees issued by the PSBs, the sources added.

When contacted, officers in the PSBs said that the RBI had not issued any "point blank restriction" against Iraqi banks, but added that there could be sanctions against certain entities based in Iraq, which in turn is making it difficult for them to give such guarantees.

"If we facilitate such transactions, the payment could get blocked and then the settlement becomes an issue. We are careful because the sanctions list brought out by the US and EU is a dynamic one and we need to watch out for the countries as well as the entities named in them," a PSB official.