‘RBI’s ban on LoUs may push up the cost of imports’

‘RBI’s ban on LoUs may push up the cost of imports’

Context

Interview with SBI chairman Rajnish Kumar

What will be the impact of RBI’s ban on Letters of Undertaking (LoU)?

The cost of imports will go up. What was happening was importers, through the route of LoU they were availing dollar funding which was cheaper than rupee funding. So now, the importer will have an option of either opening a letter of credit, but for that they will need suppliers’ agreement – the supplier should be willing to extend the credit. Or otherwise, they have to fund it through rupee borrowing. So, that will increase the cost. And if they are exporting, then it will impact your export competitiveness also. So, the impact overall will be that the dollar borrowing of many of the importers will get either replaced by the letter of credit

What has been the response from the banking regulator for improving checks and balance after the PNB scam?

• RBI has asked all the banks to integrate SWIFT with the core banking solution
• All banks are now linking SWIFT with CBS.

What are the steps SBI has taken?

We thoroughly reviewed our LoU portfolio. Risk management in the bank is a continuous process and not a one-day process. Period review, see to it that checks and balances are working, you have to on a continuous basis.

RBI came out with a circular tightening NPA norms. What is your view?

There are two ways to look at it. One is there are definitely bring more discipline on the borrowing. Borrowers will be more careful on how they manage their cash flow and the intent will be to repay bank dues in time. However, on certain things probably some relief is required. The Indian Banks’ Association has represented to RBI on these issues

What are the issues?

One of the things that the circular says is that before an account is upgraded, 20% has to be paid. I think that is a bit tough requirement. Similarly, if the account is under restructuring and even if there is a delay of one day and then the account has to be referred to NCLT within 15 days