Trade finance in limbo as scam-wary banks turn extra cautious

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 said.

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.

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.

While one private sector banker said the trade is availing of the same, LoU-based short-term loans are coming in at a premium of 10-30 basis points, another private banker said in some cases it has gone up to even 50 bps.

One of the two bankers cited above said calls are being made to the issuer bank for reconfirming the genuineness even though it is not supposed to be done, because an LoU is generally taken at face value.

"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 said.

"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 counterparties. We are putting certain limits in place so that in future such things do not happen again," Rai added.

"If PNB does not honour the commitment of paying up as newer LoUs mature, it will affect the country a lot as it may not be only Indian lenders which will be having exposures to Modi's firms through PNB issued LoUs," said another banker.

Bankers say more than the interest income, they look at trade finance as a source of fee income. This results in many banks using a vibrant secondary market to pass on their dollar exposure to other lenders, including foreign ones too.

"This is a business that we cannot stop. In foreign branches, 60-70 per cent business happens through letters of credit, buyer's credit and bill discounting. We are not slowing down but checks will be tougher," Rai said.