Given all the banking crises talk, it was odd to see this working paper from RBI research team titled – “Non-Linear, Asymmetric and Time-Varying Exchange Rate Pass-Through: Recent Evidence from India”. Research should continue but it should be on relevant issues. Indian central bank has remained alarmingly silent all this while no matter the scale and size of the issue.
And then there was this notification from the central bank asking banks to discontinue LoUs/LoCs with immediate effect. But then is the problem with LoU/LoC as an instrument for trade finance or with banking culture in general?
Attention of Authorised Dealer Category – I (AD Category – I) banks is invited to paragraph 2 of A.P. (DIR Series) Circular No. 24 dated November 1, 2004 and paragraph No. 5.5 of Master Direction No.5 dated January 1, 2016 on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers’ (Master Direction), as amended from time to time, on the issuance of LoUs/ LoCs/ guarantees for Trade Credits for imports into India under delegated powers of AD banks.
2. On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect. Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.
3. AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers.
4. The aforesaid Master Direction No. 5 dated January 01, 2016 will be updated to reflect the changes. The changes will be applicable from the date of issuance of this circular.
5. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/ approvals, if any, required under any other law.
It is again one of those notices which are difficult to understand with several hyperlinks and jargons to figure.
Ideally, RBI should have given us some more information with this notice. How much trade finance is done via LoU/LoC currently, What will be the likely impact of this measure and so on. More importantly, are there more cases of other banks also misusing LoU/LoC leading to this measure?
All this while, one is also seeing banking crisis in other countries and responses from their central banks. They are not just being held accountable but even sharing more information via speeches, statements and so on. Here, we see neither of the two happening. So much so, the former RBI Governor in a recent interview said we didn’t know anything about the crisis. What is the point of having a big RBI team of bank auditors and inspectors and so on.