PNB fraud freezes India's trade finance market

The Rs 12,717 crore fraud at Punjab National Bank (PNB) has forced banks to freeze the issuance of new letters of credit to companies until they reconcile with the existing liabilities, according to senior bankers.

Indian banks have $26.6 billion of trade credit issued in the form of letters of credit and letters of Understanding (LoUs) that will come up for repayment in the next six months to one year, according to government data on external debt. These are guarantees given to Indian companies in the form of trade finance.

Meanwhile, Reserve Bank of India (RBI) is also conducting extensive audits to identify the authenticity of the huge non-fund based liability on every bank.

"It is currently conducting audits on designated forex branches of Indian banks, resulting in banks freezing the issuance of new LoUs. "RBI is scrutinising all the non-fund based exposures of banks and reconciling the data, and there are no quotes in the market for these instruments, which means that even if one bank wants to issue, no other bank is willing to offer payment on the guarantee," said a forex dealer.

A senior banker with a large public sector bank said, "There is a huge amount of LoUs coming up for maturity in the next six months, so there is a temporary freeze on the issuance of Louis until all our pending commitments are reconciled."

Some of the public sector banks have also sent circulars to their branches, instructing them not to issue fresh LoUs until further orders as a matter of caution.

"Given that some of the six to 12 month exposures will now move into less than six month maturity bucket, and if these exposures are not rolled over or switched through fresh issuances there is a reasonable case for rupee weakness in the coming weeks as more and more corporates will be forced to liquidate their foreign currency liabilities," said a currency expert.

Some of the smaller banks are also talking of liquidity issues in the international branches after PNB is delaying payments to them on the LoUs issued by their international branches.

Another foreign banker said, "There is a scramble for dollars in the forex market. But it could be a temporary phenomenon. But companies, especially the smaller ones will suffer for want of working capital finance."

Rating agency CARE said in a report, "Foreign trade in jewellery would come down by 5-6% for 2018-19. Sales to be impacted by around 16%. Employment to come down by around 3,000 permanent staff for these two companies, which could impact another 7,000-8,000 non-permanent staff directly and indirectly."

RUPEE FACES HIT

• If some of the exposures are not rolled over there is a reasonable case for rupee weakness in the coming weeks
   
• More corporates will be forced to liquidate their foreign currency liabilities