RBI Ban on LOU/LOC will hurt SMEs & Exporters

*Kumar Aniket

Indian Exporters have been facing serious problems because of GST impact on Exports on account of arbitrary withdrawal of GST exemption of Penultimate Sale, which has been prevalent in India for long time. Exporters have incurred serious losses on account of implementation of GST in arbitrary manner without regard to interests of exchange earners i.e. the exporters. Now, our own Reserve Bank of India has dealt another blow to Indian Businesses by ordering a blanket ban on LOUs/LOCs i.e. Letter of Undertaking/Letter of Comfort.

This is an attempt to close the barn door after the horse has bolted in response of #Niravgate. Nirav Modi or similar scams happened because Public Sector Banks (#PSBs) enjoy certain protection from RBI action and RBI cannot take strong punitive actions against PSBs as it does not have the power to supersede their board, which it has in the case of Private Sector Banks like ICICI Bank etc. Further, if RBI levies any penalty on these PSBs, their officers don’t give a damn as the bill the paid by the government i.e. taxpayers. It is a well known fact that Public Sector Banks have strayed away the reason for their existence, which is making credit options available to common public. PSB employees have grown overly corrupt over time because of permanent nature of their job while common man is forced to explore NBFC or local moneylenders for credit.

Niravgate Scam has corrupt Punjab National Bank employees at its heart. It was a case of blatant abuse of existing systems and it could not have happened without CMD or even Banking Secretary level involvement or tacit support. The total amount that has been swindled in the country’s biggest banking scam ever has now gone up to a humungous Rs 13,578 crore. In a court filing on March 12, 2018, police said the Gitanjali group of companies controlled by jeweler Mehul Choksi allegedly defrauded Punjab National Bank (“PNB”) of Rs 7,080 crore. Nirav Modi and his Mehul Choksi colluded with employees of Punjab National Bank (I refuse to write employees of PNB’s Brody House Branch and I do not believe that this kind of scam amounting to thousands of crore is possible without involvement of top guns in PNB as well as Finance Ministry). Otherwise how can companies get LOUs/LOCs to staggering amounts without having any pre-approved credit limit. I have tried to get some Foreign Letter of Credits encashed and it was not possible to get without assignment of credit limits. Furthermore, these Companies of Nirav Modi Group have been allowed short term credits from overseas branches of Indian Banks based on these LOUs/LOCs.

Niravgate exposes the corruption in Public Sector Banks and since senior powers in Finance Ministry has already started finding ways to distract public from this issue. May be RBI actions like this is an attempt to make lots of people suffer so as to distract people from corruption issues in PSBs and saving the stooges of Finance Ministry Babus. RBI attempt to put a blanket ban on LOUs/LOCs shall hurt genuine businessmen while people like Nirav Modi, Mehul Choksi and Senior PNB & Finance Ministry Babus who are real culprit are enjoying the proceeds of the scam. If RBI is really serious, it should review the workings granted by overseas Branches of Indian Banks. Overseas Branches of Indian Banks are funding Projects as External Commercial Borrowings, even for companies not having overseas presence.

Finance Minister Arun Jaitley in a written reply to a question in Rajya Sabha said that Nirav Modi obtained his first fraudulent guarantee from PNB’s Brady House branch in Mumbai on March 10, 2011 and managed to get 1,212 more such guarantees over the next 74 months. PNB’s official version is that junior employees at the Branch were involved as issued LOUs over SWIFT system (used for International Messaging System by Banks). My question is that these Banks are subject to periodical internal & external audits. How can such discrepancies not be detected during Audit? In such cases, usually is auditor is so incompetent that he can’t detect such lapses or he is paid to look the other way. Either way, Auditors deserve to punished. I hope CAG will at least blacklist the Auditors. But I have doubts as no body will try to open the can of worms which may affect powers in Finance Ministry. Our Systems is designed in a manner, which supports powerful Burocrats mostly members of powerful IAS Lobby.

Now, our hon’ble RBI is trying to murder innocents because of the crimes committed by corrupt bankers & decision makers in Finance Ministry. In a classic beating peter for the crimes of Paul, our RBI has banned LOUs/LOCs. This will be boost for Private Sector Banks as some business will move from PSBs into their kitty. However, the SMEs and rural exporters will be biggest sufferer of this move as RBI.

Shri Maqsood Ahmed, President of Emerging Businesses Chamber of Commerce said that abrupt ban on LOUs/LOCs will affect Indian SMEs who now have to seek costlier options or pay 100% upfront. He further said that this ban will hurt SMEs which are already facing survival issues arising from Demonetization combined with poor implementation of GST.” Shri Mushahid, Member of M/s. Uniserve Knowledge Foundation pointed out that Import/Export business thrives on short term credit facilities and LOUs/LOCs are cheapest mode of finance available to the Importers/Exporters as businessmen leverage these LOUs/LOCs to avail 90-days credit at LIBOR (London Inter Bank Offered Rate”) based margin rates, which are much cheaper than alternative options.  He also said that Importers were using these LOUs are cheaper way to obtain direct dollar financing and this ban will force them to purchase dollars from market putting further pressure on Rupees.

Shri Shujaat Ali Quadri, President of Muslim Student Organization said that SME segment is largest employer for our engineering and other professionally qualified graduates and if this ban hurts SMEs, its spill over effect will hurt employment chances of young Graduates. He asked that “why should everybody suffer because few corrupt PSU Bank Employees violated established processes may be with help top brass in Finance Ministry and their own corporate headquarters.”

RBI Governor (who comes from Gujarat, it seems being a Gujarati is a must for getting good positions in this government) Shri Urjit Patel came on record expressing RBI’s impotence to govern PSU Banks. He categorically said that RBI does not have adequate powers to control PSU Banks. His outburst about RBI’s impotence in controlling PSU Banks have been hotly contested by Finance Ministry Babus. They have openly said that RBI has more than adequate powers to regulate PSU Banks. They questioned if why RBI has not raised the issue when Banks continued to flout its advisory despite issue of warnings by RBI. However, What Finance Ministry Czars have forgotten that there are several other issues were Banks continue to flout RBI advisory and nothing is being said or done about it. For example, RBI has advised Banks time and again from desisting from Bancassurance model and specifically refrain from forcing sale of Insurance on their hapless consumers. It is well known fact that despite RBI warnings and advisories Banks continue to force their loan consumers to buy Insurance at arbitrary rates.

Anyway, coming back to the abrupt ban on LOUs/LOCs, we have to consider RBI point of view, which is apart from a blanket ban, nothing works for our PSU Bankers, who just don’t care about anything other than dictats of Finance Ministry. Finance Ministry Babus have turned our PSU Banks into tools for crony capitalism. Public Enterprises Selection Board combined with Finance Ministry Babus (read #IASLobby) has used PSUs as IAS Employment Bureau to give plum positions to well connected IAS Officers. We should not forget the case of Shri U. K. Sinha who got appointed to the board of a leading PSU Bank as CMD and then moved on to become head of SEBI. Prime Minister Modi should consider the influence enjoyed by powerful lobbies in Banking Sector, if it really wants to regulate Banking and control crony capitalism. And for god sake, Regulatory bodies need to stop the practice to imposing such bans arbitrarily to cover their frustration over their impotence to actually cause some changes in our corrupt system.

*Kumar Aniket is an Expert on International Finance