As Sri Lanka grapples with a severe currency crisis, India’s major banks have become cautious and selective about their exposures to the island nation.
Several institutions have reduced discount letters of credit (LC) – the basic instrument for trade finance – issued by many Lanka lenders while others provide credit to exporters based on the reputation of the party, the amount, the duration of the credit and the quality of the bank issuing the LCs.
Given the long duration of trade relations, Sri Lanka’s dependence on imports, and expectations of lines of credit (from India and other countries) and possible foreign exchange deals, bankers hope the country can overcome the crisis in the medium term.
In early December, Sri Lanka’s foreign exchange reserves were just enough for a month of imports.
âWe have not put a complete embargo on the discounting of export invoices to Sri Lanka. This is done on the basis of the limits available with the LC issuing banks, âsaid a senior official at the State Bank of India, the country’s largest lender.
Among other large banks, HDFC Bank was slow to manage letters of credit for exports to Sri Lanka, Axis which has funded many Indian companies exporting to Sri Lanka is selective, while ICICI Bank lowered limits for the Sri Lanka as well as some of the other small countries for quite some time now. IndusInd, a bank official said, is closely monitoring developments and has been selective in corporate transactions.
âThere is nothing wrong with banks in Sri Lanka. But when the payment comes due, there may not be enough dollars available in the forex market there, âsaid one banker.
India’s total exports to Sri Lanka amounted to $ 3.2 billion in 2020. Oil, ships, boats, pharmaceuticals, sugar, iron and steel, cotton and machinery is one of the main export products.
Under the normal trade finance agreement, an exporter is paid by their bank which discounts the invoice after documents such as shipping invoices, commercial invoices, and bills of lading have been submitted to the bank. The bank is paid after a certain time – the credit period which can be up to six months (or a year or more for capital goods) – by the importer’s bank (here the Sri Lankan buyer ).
Banks discounting bills have become nervous as Sri Lanka runs out of dollars and the Sri Lankan central bank may not be able to provide dollars when banks of importers need to make payments to banks of exporters in India.
Payments against sight bills, where (under normal circumstances) funds are transferred within five working days, take more than a month, said an official at a leading export promotion organization. Some exporters, said an official at a consumer goods company, extend 6 to 7 month lines of credit to distributors who undertake exports to Sri Lanka.
Although large multinational banks like HSBC, Citi and Standard Chartered, which have a long presence in Sri Lanka, continue to expand trade finance with some caution, they have the comfort of dealing with their respective Lanka office as counterpart.
âSome banks just don’t give any credit, they just operate on a collection basis. They only release the money after receiving it from the bank in Sri Lanka, âsaid one medium-sized exporter.
Banks as well as Indian exporters are awaiting the $ 1.5 billion line of credit. Of this amount, it is understood that a line of $ 500 million would be issued by Exim Bank of India in Sri Lanka very soon. âNegotiations are underway between India and Sri Lanka on how the money would be used. In all likelihood, the use could be limited to the import of oil and other essentials by Lanka, âsaid one banker. Exim Bank has so far provided 11 lines of credit in Sri Lanka, totaling more than $ 2.12 billion.
Given that tourism – which suffered greatly after the Easter terrorist attack and the Covid-19 pandemic – has been the main source of hard currency for Sri Lanka, banking circles believe the country may need to conclude from other arrangements if a balance of payments problem persists. âPerhaps, the kind of deal that exists between India and Nepal. If Indian tourists could spend Indian rupees in Sri Lanka, that would ensure a supply of rupees that could be used to purchase Indian goods. this can have banking and regulatory implications and can only be put in place after the pandemic is over and travel restrictions lifted, âsaid another. (Courtesy of Economic Times)
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