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 Sri Lankan lenders while others extend credit to exporters based on the position of the bank. part, amount, duration of the loan and position. 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 would be able to overcome the crisis in the medium term.

In early December, Sri Lanka’s foreign exchange reserves were just enough for a month of imports.

“We 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, ”said a senior official at the State Bank of India, the country’s largest lender.

Among the other large banks, HDFC Bank was late in processing letters of credit for exports to Sri Lanka; Axis, which has financed many Indian companies exporting to Sri Lanka, is selective; while ICICI bank has been lowering limits for Sri Lanka as well as some other smaller countries for some time now. An official at IndusInd Bank said he was monitoring developments closely and had been selective in transactions undertaken.

“There 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, ”said one banker.

India’s total exports to Sri Lanka amounted to $ 3.2 billion in 2020. Petroleum, 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 Central Bank of Sri Lanka (CBSL) 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 six to seven month lines of credit to distributors who undertake exports to Sri Lanka.

Although large multinational banks (MNCs) 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 convenience of dealing with their respective offices in Sri Lanka. Lanka as a counterpart.

“Some 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, ”said one medium-sized exporter.

Banks as well as Indian exporters are awaiting the $ 1.5 billion line of credit. From this it is understood that a $ 500 million line would be issued by Exim Bank of India in Sri Lanka very soon. “Negotiations 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, ”said one banker. Exim Bank has so far provided 11 lines of credit in Sri Lanka, totaling more than $ 2.12 billion. Given that the tourism industry – 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 owe enter into other agreements in the event of a balance of payments problem. persists.

“Perhaps, the kind of deal that exists between India and Nepal. If Indian tourists could spend Indian Rupee (INR) in Sri Lanka, it would ensure a supply of rupees that could be used to buy things. from India. But it may have central banking and regulatory implications and can only be put in place after the pandemic is over and travel restrictions are lifted, “said another source.

(Economic time)