PNB’s LoU story spoils plot for import finance

Import finance, crucial for ensuring critical supplies for India’s industrial and consumer needs, faces serious restrictions as banks clamp down on issue of letters of undertaking (LoUs) after a bunch of employees at Punjab National Bank were caught issuing fake LoUs in the country’s biggestever corporate fraud. 

Lenders such as Axis Bank, Canara Bank, IDBI Bank have either cut back on issuing LoUs or stopped them for certain categories one week after the scam unfolded. Some banks have also started demanding more documents and told clients to submit papers two days in advance. Earlier, banks used to extend buyers’ credit against LoUs within a day. The fund shortage forced importers to buy dollars in domestic spot and forwards market in order to keep their payment commitment to overseas suppliers. This pushed down the currency following which RBI intervened. 

“Importers are facing difficulties to avail trade finance amid heightened vigilance,” said Anindya Banerjee, currency analyst, Kotak Securities. “We are witnessing additional dollar buying by importers in spot and forwards markets... they need to meet payment liabilities immediately in absence of rolling over trade finance. Rupee will be under pressure till importers arrange shortterm trade credit overseas.”  #casansaar (Source - Economic Times)