Pricing of trade loans may go up; rates rise by 0.5%

The fallout from the biggest banking fraud is spreading to the market for trade financing, as foreign lenders become more reluctant to accept the guarantees from their local counterparts that underpin the loans.

Citigroup, Deutsche Bank, Standard Chartered, and HSBC Holdings are among banks reducing exposure to these transactions, used by smaller companies to access short-term dollar funding, said sources. As questions are raised about the creditworthiness of guarantees from state-run banks, rates have risen by as much as 0.5 percentage point for some types of financing, the people said, asking not to be identified as the details are private.

Foreign banks’ reaction to the $2 billion fraud disclosed by Punjab National Bank two weeks ago is having an impact on financial markets. Signs that trade credit is getting tougher for smaller firms have hurt the rupee, which is among Asia’s worst performers this month and is poised for its first monthly loss since September. Big Indian companies, which have direct access to funding from foreign lenders and don’t rely on interim guarantees, aren’t affected by the slowdown, the sources said.

Spokesmen in Mumbai for Deutsche Bank, HSBC and Citigroup declined to comment. “We continue to support our clients on transactions that meet our internal controls and standards,” a spokesman for Standard Chartered said by email.

India runs a trade deficit, which means it needs a constant supply of dollars. These come through foreign funds’ purchases of stocks and bonds, local exporters’ sale of foreign-currency earnings and dollar loans from foreign banks. India is one of the world’s biggest users of trade funding, according to the ICC Global Survey 2017.

The rupee has weakened 2 percent this month, the biggest drop in Asia after Indonesia’s rupiah. Concerned about the currency, India’s central bank is in touch with foreign lenders and is urging them to resume trade loans, the people said.