This has increased costs as importers are having to buy more dollars at a time when rupee is depreciating
Suspension of Letter of Undertaking (LoU) and Buyers Credit by banks three months ago has now raised fresh demand for liquidity among importers as the payment cycles of the LoU regime and the new regime are overlapping. This has increased costs as importers are having to buy more dollars at a time when rupee is depreciating.
Public Sector Banks had stopped issuing LoUs about three months ago in the aftermath of the Nirav Modi scam. Importers buy goods based on their Letter of Credit (LC) for which they have to make payments after 90 days. LoU and Buyers Credit gave them an additional window of 180 days with a nominal interest rate, extending the payment cycle from 90 days to 270 days.
For importers who gave Letter of Credit after suspension of LoU in late March this year, the time has come to repay the bills. Moreover, the cycle for Letter of Credit issued between September-October 2017 is also ending now, making importers pay two installments in the same month.
"I am a victim of overlapping cycles. We have to make arrangements for two installments simultaneously," said Jaimin Vasa, president of Gujarat Chamber of Commerce and Industry (GCCI).
Bhupendra Patel, former president of Gujarat Dyestuffs Manufacturers Association (GDMA) said that this has increased demand for dollars at a time when the rupee is depreciating against the dollar.
"The rise in demand could also be one of the reasons behind the dollar strengthening against the rupee. The fact is that overlapping of payment cycles has increased the burden of payment at a time when there is a shortage of liquidity in the market," said Patel. Prompt Corrective Action by national banking regulator on 11 nationalised banks has aggravated the shortage.
Industries like chemicals and pharmaceuticals are heavily dependent on imported raw materials and players in these sectors are adversely affected by shortening of the payment cycle.
Chirag Doshi, former chairman of Indian Drug Manufacturers Association (IDMA) in Gujarat said that small-time manufacturers are not much affected as they buy imported raw material from mercantile traders and not directly from foreign suppliers.
Yatindra Sharma, MD of KHS Machinery said that the engineering sector is not affected and the impact is limited to the import component in overall cost dynamics. "The import component is not generally more than 20 per cent, so the impact is limited. Those who import consumer durables and sell by minor value addition will be hit hard," he said.
WHY SUSPENDED
Public sector banks had stopped issuing LoUs about three months ago in the aftermath of the Nirav Modi scam. Importers buy goods based on their Letter of Credit (LC) for which they have to make payments after 90 days.
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