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Monday June 27th, 2022

India banks slash packing credit for Sri Lanka shipments, cuts risk limits

ECONOMYNEXT – Banks in India have further tightened packing credit for exports to Sri Lanka and cut risk limits amid forex shortages in the island which were delaying payments, and heightened risk perceptions, a report said.

Several Indian banks have reduced discounting letters of credit issued by Sri Lanka banks to importers in the island, India’s Economic Times newspaper said.

Other Indian banks were giving credit to exporters based “on the standing of the party, amount, the tenor of the credit, and standing of the bank issuing LCs,” the report said.

Meanwhile the newspaper said banks in India were following different policies to reduce exposure to Sri Lanka.

“We have not put a complete embargo on discounting export bills to Sri Lanka,” Economic Times quoted an official of State Bank of India, the country’s largest lender as saying.

HDFC Bank was “going slow” on handling LCs for exports to Sri Lanka while, Axis that has financed many Indian companies with exports to Sri Lanka is being selective, the report said.

ICICI Bank has cut limits for Sri Lanka earlier. IndusInd was “closely monitoring the developments and has been selective in the transactions undertaken,” the report said.

HSBC, Citi, and Standard Chartered, which have a long presence in Sri Lanka, continue to extend trade finance with certain precautions, as they have a branch in Sri Lanka as a counter party.

“Some banks are simply not giving any credit, but are simply operating on a collection basis. They are releasing money only after receiving it from the bank in Sri Lanka,” said a mid-sized exporter.

Many foreign banks tightened risk limits to Sri Lanka with the country being downgraded to ‘CCC’ in 2020 and limits were progressively cut as there were delays in releasing dollars for containers creating a dollar funding crisis in the island and driving up swap rates and inverting forward rates.

Market participants have said a recent downgrading of credit to ‘CC’ led to further tightening of counterparty limits from banks abroad and spike in swap rates as lenders struggled to balance books.

Sri Lanka banks faced limit problems very early with Japan based banks market participants have said. When some supplies had demanded that LCs of Sri Lanka banks be counter-signed, Indian banks had come forward at first. However they had later pulled back as risk perceptions went up.

One of the biggest hits that a country gets from default is on the import trade as foreign suppliers
avoid shipping goods over payment fears or demand prepayment.

Some of the effects on now seen in the island are coming ahead of an actual default. (Colombo/Jan08/2021)

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