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Trade finance hit,as caution prevails, premium soars

Monday, March 05, 2018

In what can impact the exim trade, the Rs 12,700-crore Nirav Modi scam at Punjab National Bank has affected trade finance activities as lenders have become extra cautious, while the premium on Indian paper has shot up by 10-50 bps, say bankers.

"The PNB fraud has already affected trade financing. No bank is now prepared to extend letters of understanding (LoUs). The ability of a company to raise money through LoUs from abroad has been affected badly," a senior official from a state-run bank has told PTI.

A private sector banker closely associated with the activity echoed the same, saying lenders have taken a "cautious" approach in the aftermath of the largest financial fraud in the history of the nation.

Despite the immediate setback, bankers, however, feel that there will not be a complete freeze so that a genuine businessman's operations are affected.

An LoU is a guarantee by a bank to pay another lender for import by companies and is considered very crucial for cross-border trade which helps the importer access funds at lower costs.

Meanwhile, bankers said the cost of funds for domestic exporters/importers has gone up considerably following the scam, as for the LoUs already issued, a "risk premium" has already been set in for any Indian paper.

"Historically, there has been no default on buyer's credit, as it is guaranteed by another bank, and so we take it as 100 per cent safe business. This is for the first time that we saw a problem. We are building some mechanisms to strengthen it," Union Bank of India Managing Director and Chief Executive Rajkiran Rai G told PTI.

"In the Nirav Modi case, our people got carried away by the PNB guarantee and they took that risk. Now, we are taking care of that and even though it is a guarantee from government-run bank, we'll evaluate counter-parties. We are putting certain limits in place so that in future such things do not happen again," Rai added.

The scam, came to light only on February  14, has also dented the country's profile at the world stage, said some other bankers who spoke off-the-record, adding the delay in finding a resolution will further dent the image.

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