PNB scam fallout: RBI’s ban of LOUs will hurt SME importers, says India Ratings

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Published: April 5, 2018 4:05:26 PM

After the RBI banned issuance of Letter of Undertakings for all importers with immediate effect in a bid to prevent a Rs 11,400 crore Punjab National Bank fraud, the move will negatively impact the financial flexibility of Indian importers especially for SMEs.

pnb fraud case, pnbnetbanking, pnb home loan, pnb aadhar link, punjab national bank customer care number, PNB, punjab national bank, nirav modi, mehul choksi, PNB fraud, PNB scam, PNB money safetyIndia Ratings said that the SMEs in the importing business are likely to report an increase in net working capital requirements, exerting further pressure on their liquidity profiles. (Image: PTI)

After the Reserve bank of India banned issuance of Letter of Undertakings for all importers with immediate effect in a bid to prevent a Rs 11,400 crore Punjab National Bank fraud, the move will negatively impact the financial flexibility of Indian importers especially for SMEs says a report. According to a report by India Ratings and Research (Ind-Ra), the recent ban on LoUs by the RBI may pose challenges to banks to provide necessary support to importers.

Earlier, PHD Chamber President Anil Khaitan told the Financial Express that the move will result in hiking working capital requirement of industries and disrupt trade. However, as the Reserve Bank of India has not banned the use of letter of Credit, the traders will now look towards Letters of Credit (LCs) and bank guarantees to conduct their businesses, say industry insiders.  

In its report, India Ratings and Research said that the SMEs in the importing business are likely to report an increase in net working capital requirements, exerting further pressure on their liquidity profiles. “The curb on the mobilisation of foreign currency working capital funds is likely to translate into liquidity pressure and higher funding costs for small and medium-sized corporates in the short term,” the report said. However, the firm observes that impact on large-sized players is likely to remain subdued.

According to the firm’s estimates, the aggregate interest coverage of the top 160 importers who avail buyer’s credit to contract by about 0.41x (from 4.03x). Post the scam perpetrated by billionaire diamond merchant Nirav Modi, industry body Assocham had asked to limit the collateral damage of India’s biggest banking scam. In February, Assocham Secretary General D S Rawat said that public pressure post the major fiasco has led to the  the banks becoming cautious and the regulators to act tough. According to him, it can snowball into a major trust deficit in the system.

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