After India’s apex bank RBI decided to crack the whip and barred all lenders from issuing letters of undertaking as well as letter of comforts after the major Rs 12,700 crore fraud allegedly committed by billionaire diamond merchant Nirav Modi, experts and industry insiders say that the move will hurt export related sectors. Yesterday, RBI said in a statement that after reviewing the the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect. The statement added that banks could continue issuing credit guarantees in the forms of letters of credits and bank guarantees, if certain conditions are met.
Global firm CLSA says that the change in regulation will impact fees and NII (Net Interest Income) of key sectors such as gems, jewellery and electronics. According to the firm, the sustainable impact should be limited in the longer-term. CLSA notes that businesses will now have to move to other sectors such as LCs and guarantees. Notably, earlier this week, industry body Assocham had cautioned against overreaction by banks and the investigative agencies saying that it will hurt essential credit disbursement to the trade and industry hampering growth expectations.
The industry body noted that there is humungous public pressure post the major fraud in India’s second largest lender that has led to the the banks becoming cautious and the regulators to act tough. Sanjeev Bhatia, the CFO of PC Jeweller told CNBC TV18 that LOUs and LCs were mainly used to import loose diamonds. Further, he attributes the slackening in demand to seasonality rather than the PNB fraud. In the same interview, he noted that banks have now turned cautious in lending to the sector.
In February this year, the Federation of Indian Export Organisations (FIEO) raised concerns over the knee-jerk reaction by banks on the gems and jewellery sector saying that the sector is crucial for employment generation in the country, and it was imperative to treat the ongoing fiasco as an independent case. “These are isolated cases. Let us not blame the sector,” Ajay Sahai of FIEO told ET Now and also made a case for having a fair assessment of the credit requirement of the sector by banks and lend accordingly.