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PNB scam fallout: Outstanding buyers’ credit shrinks by $25 b

The Hindu Business Line Published our report on Buyers Credit Outstanding going down by $25 Billion on today’s front page.

Published with Approval: Original Article Link

PNB scam fallout: Outstanding buyers’ credit shrinks by $25 b

MUMBAI, AUGUST 23

In the aftermath of the 12,600-crore scam at state-run Punjab National Bank, access to overseas credit has become increasingly difficult, especially for small and medium enterprises (SMEs). In fact, the overall outstanding buyers’ credit has shrunk by 1.72-lakh crore (or $25 billion) since June 2017.

Most of this has run down after March 2018, when the Reserve Bank of India banned letters of undertaking (LoUs).

According to data compiled by trade finance firm buyerscredit.in, overall outstanding buyers’ credit (OBC) stood at 3.43-lakh crore (or $49.4 billion) as of June-end 2018, compared to 5.15-lakh crore or $74.21 billion as of June-end 2017.

The most affected are State Bank of India, Bank of Baroda, and Bank of India.

“There is a big gap in financing, and trade finance of less than $1 million is hardly taking place, which is a big problem for small and medium enterprises,” said Sanjay Mandavia of buyerscredit.in.

Alternative instruments such as bank guarantees and letters of credit are expensive and time-consuming.

The RBI had barred banks from issuing letters of undertaking (LoUs) and letters of comfort (LCs) after it was found that these facilities were allegedly used by billionaire jewellery designer Nirav Modi and his uncle Mehul Choksi to make fraudulent transactions of over 12,600 crore.

Prior to the ban, in September 2017, the OBC was pegged at close to $91 billion.

According to the data, which is based on banks’ first-quarter results, the OBC for the overseas branches of SBI was down to 4.92 per cent of total advances, as against 24.09 per cent earlier. In fact, the OBC of the bank is estimated at 13,132 crore at the end of June 2018, against 67,218 crore a year ago.

Similarly, the outstanding buyers’ credit for Bank of Baroda shrank by 30,244 crore to 16,654 crore at the end of June 2018 from a year ago.

“For overseas branches of Bank of Baroda, OBC used to contribute 42 per cent of total advance, which is down to 17.38 per cent,” said the report.

For international branches of 10 other banks, including Punjab National Bank, ICICI Bank, Allahabad Bank and IDBI Bank, advances have reduced by 17.3 per cent to 2.41-lakh crore by June-end 2018 as compared to June 2017.

“With the available data, it is clear that buyers’ credit used to be a major chunk of business of overseas branches of Indian banks. Alternative products like letter of credit and bank guarantee have failed to pick up as predicted,” said the report, adding that the outstanding balance will see a further run-down in the next quarterly results as buyers’ credit taken against raw material import gets repaid.

Published on August 23, 2018
Hindu Article

Buyers Credit Outstanding Down by $25 Billion

Since RBI Stopped Buyers Credit Transactions against LOU and LOC, few questions kept on coming up regularly

  1. What was the outstanding amount of buyers credit in overseas branches of Indian Bank as RBI data did not provide bifurcation products wise ?
  2. What is the run down in books of these bank since 13 March 2018 RBI Circular ?
  3. What is its impact on Libor based finance available to Indian importers ?

In this article we have provided the data and analysis which will answer the first two questions.

Summary

  1. Overall Buyers Credit Outstanding is down by Rs. 172413 Cr ($25 Billion) since June 2017 and most of these run down is post March 2018 RBI decision. Above amount will be still higher as the available data does not include :
    • HDFC Bank and Axis Bank Overseas Branches Outstanding.
    • Offshore banking unit (International Financial Service Centre  i.e. IFSC based in GIFT City) outstanding is not separately provided in the quarterly results. Many banks like Yes Bank, Kotak Bank, ICICI Bank, HDFC Bank etc were increasingly using IFSC branches for buyers credit business.
    • Buyers Credit Outstanding data for Foreign banks is not available
  2. SBI, BOB and BOI are the main banks affected.
  3. With available data, now it is clear that Buyers Credit used to be a major chunk of business of Overseas branches of Indian Banks. With this option closed, pace of consolidation of overseas branches of Indian will increase.
  4. Alternate products like Letter of Credit and Bank Guarantee which were supposed to be alternative of LOU / LOC have failed to pick up as predicted. Thus taking a toll on Indian Importers.
  5. Simultaneously it has also somewhere impacted the below two :

SBI, BOB & BOI Buyers Credit Outstanding – June 2018

Rs. In Crores

Sr. No Bank Branches June 18 June 17 Reduction
1 SBI 52 13132 67218 -54086
2 BOB 50 16654 46898 -30244
3 BOI * 29 72059 109492 -37433
Total 101845 223608 -121763
Total in $ (69.5) 1465 3217 -1752
  1. Buyers Credit Outstanding is down by Rs. 1,21,763 Cr ($17.52 Billion) for these 3 banks.
  2. For SBI overseas branches buyers credit outstanding used to contribute 24.09% of total advances which is down to 4.92%.
  3. For BOB overseas branches buyers credit outstanding used to contribute 42% of total advance which is down to 17.38%.
  4. Outstanding balance will see further run down in the next quarterly results as buyers credit taken against raw material import gets repaid. Post which pace of run down will reduce as outstanding amount will be related to capital goods import. Buyers credit was allowed for upto 1 year for raw material import and for capital goods import it was allowed for tenure upto 3 years with LOU / LOC.

* BOI Data is for overall advance in overseas branches, as bifurcation of buyers credit outstanding is not provided.

Reference: SBI June 2018 Quarter Result, BOB June 2018 Quarter Result, BOI June 2018 Quarter Result

Rest Banks Overseas Branches Total Advance Outstanding : June 2018

  1. For rest of the banks international branches advances has gone down Rs. 50650 Cr ($7.29 billion) in last one year and more so after RBI ban on LOU/LOC
  2. Outstanding balance will see further run down in the next quarterly results as buyers credit taken against raw material import gets repaid. Post which outstanding amount will be related to capital goods import.

Rs in Crore

SrNo Bank Branches June 18 June 17 Reduction
1 IOB 7 10403 12545 -2142
2 PNB 3 31854 41123 -9269
3 Allahabad Bank 1 10183 13125 -2942
4 IDBI Bank 1 15139 22739 -7600
5 Union Bank India 4 19789 29492 -9703
6 Canara Bank 8 49595 55302 -5707
7 Indian Bank 4 6142 6319 -177
8 Syndicate Bank 1 34444 39302 -4858
9 UCO Bank 4 19164 22610 -3447
10 ICICI Bank 12 44792 49598 -4806
11 HDFC Bank 3
12 Axis Bank 5
Total 184 241504 292155 -50650
Total in $ (69.5) 3475 4204 -729

Reference: Quarterly Results are taken from BSE India

  • For the above banks, outstanding amount is total advance of their international branches, as specific bifurcation of their buyers credit outstanding is not provided.
  • Data may or may not include offshore banking unit outstanding as quarterly result does not provide any clarification on the same (International Financial Service Centre based in GIFT City).
  • Number of branches data is based on Jan 2018 RBI data. Post which many branches have been closed.
  • ICICI Bank Data was in $ terms, conversion taken at 69.50 rate
  • For HDFC Bank and Axis Bank, their international branches advance outstanding is not available in quarterly result and thus it has been kept blank. Will update it as an when further information is available.

Reference

Why are Indian Banks Closing Overseas Branches ?

Indian Banks have closed 37 Overseas branches till date and another 60 – 70 branches are under review. This article gives an overall summary of Indian banks presence internationally, reason for reducing number of branches and bankwise update on branches closed or in process of closing.

Summary of Indian Banks Presence Internationally

Formation Number of Locations Remarks
Overall Presence 302 State Bank of India : 92
Bank of Baroda : 70
Bank of India : 38
Rest others
Branches * 185 United Kingdom : 32
Hong Kong : 13
UAE : 13
Singapore : 12
Rest others
Subsidiary 26 Data does not include branches of subsidiaries
Joint Venture Bank 8
Representative Office 48
Other Offices 35 Electronic Banking Service Unit; Extension Counter; Indian Visa Centres; Marketing office; Sub office; Remittance centre; Regional Head Office

41 branches were in loss in the financial year 2016-17

Rationalisation of Overseas Operation of PSBs

Public Sector Banks (PSBs) Manthan was held on November 11-12, 2017 in which below recommendations were made related to overseas operations of nationalized banks.

AP-14. Rationalise overseas operations within and across PSBs for cost &  efficiencies and synergies in overseas markets:

(a) Based on competitive strength and viability

(b) Draw up Business-Unit-wise Board-approved plan, for time-bound closure/consolidation as per due procedure, to:

(i) Close non-viable branches;

(ii) Consolidate operations in the same geography, taking into account operations of other PSBs; and

(iii) Consolidate equity stake in joint venture having multiple PSB partners

Impact on Buyers Credit & Suppliers Credit

  1. Less number of branches, means less competition. Overall costing of transaction will go up.
  2. Over a period of time, branches had their niche in market. Like there are few branches dealing only in small ticket transaction (< $1 lac). With closure of any of these niche branches, it will become difficult for arranging funds for small ticket transactions.

Bankwise update on Closure / Merging of Overseas Branches

State Bank of India Overseas Branches Latest Update

Overseas Location Closure Date
SBI Paris Branch 30 September 2018
SBI Tianjin (China) Branch 30 September 2018
SBI Jeddah (Saudi Arabia) Branch 30 June 2018
SBI Muskat (Oman) Branch 31 March 2019
SBI Jaffna (Sri Lanka) Branch 30 September 2018
State Bank of India (Botswana) Ltd 31 March 2019
SBI London Converted Into Subsidiary

Reference: DNA Article

Bank of India Overseas Branches Latest Update

Overseas Location Status
Bank of India Bostwana Subsidiary To Be closed
Bank of India Myanmar (Yangon) Representative Office To Be closed
Bank of India Phnom Penh Branch, Cambodia To Be closed
Bank of India, Shenzhen Branch, China To Be closed
Bank of India Kisumu Branch, Kenya To Be closed
Bank of India Jersey Branch, Channel Islands To Be closed
Bank of India Beijing Representative Branch, China To Be closed
Bank of India Manchester Branch, UK To be Merged with Birmingham Branch
Bank of India Eastham Branch, UK To be Merged with London Branch

Reference: Business Today, The Hindu Line

Canara Bank Overseas Branches Latest Update

Overseas Location Status
Canara Bank Shanghai Branch Merging with Canara Hong Kong Branch
Canara Bank Bahrain Branch Merging with Canara Dubai Branch
Canara Bank Leicester Branch Merging with Canara London Branch
Canara Bank Russia (Joint Venture) Selling to SBI Russia
Canara Bank Johannesburg Branch Closing Down

Reference: Rediff.com

Bank of Baroda Overseas Branches Latest Update

Overseas Location Closure Date
Bank of Baroda Hongkong Branch To be closed
Bank of Baroda South Africa Branch Closed
Bank of Baroda Nassu Branch, Bahamas 6 July 2018
Bank of Baroda Mutrah Branch, Oman Merged with Greater Mutrah Branch
Bank of Baroda Bahrain Branch 28 June 2018
Bank of Baroda UK Branches Formation of subsidiary at UK viz. Bank of baroda (UK) Ltd. is at advanced stage and necessary approval has been received from Prudential Regulatory Authority

Reference: BSE IndiaEconomic Times ArticleBusiness Today,

Indian Overseas Bank Overseas Branches Latest Update

Overseas Location Status
IOB Dubai Branch To be closed

Reference: Business Today

IDBI Bank Overseas Branches Latest Update

Overseas Location Status
IDBI Dubai Branch To be closed

Reference: Business Today

Punjab National Bank Overseas Branches Latest Update

Overseas Location Status
PNB Sydney Representative Office Looking to Close
PNB Dhaka Representative Office Looking to Close
PNB Dubai Representative Office Looking to Close
PNB Shanghai Representative Office Looking to Close
PNB Kowloon Branch 17 August 2018

Reference: Money Control, First Post

Union Bank of India Overseas Branches Latest Update

Overseas Location Status
Union Bank of India Shanghai Representative Office Closed

Reference: Business Today

Andhra Bank Overseas Branches Latest Update

Overseas Location Status
Andhra Bank Dubai Branch Closed

Reference: Business Today

Allahabad Bank Overseas Branches Latest Update

Overseas Location Status
Allahabad Bank Hong Kong Branch To be closed

Reference: Economic Times

UCO Bank Overseas Branches Latest Update

UCO Bank to merge branches in Hong Kong 

Reference

  1. RBI : Country-wise branches of Indian Banks at Overseas Centres as on January 31, 2018
  2. Responsive & Responsible PSBs Banking Reforms Roadmap for a New India

Reserve Bank’s decision to ban LoUs will badly Impact SME

Reserve Bank’s decision to ban LoUs is a knee-jerk reaction; can backfire badly, warn traders

Article in firstpost.com printed with permission: 

An industry-wide practice that worked well until the end of business hours on Tuesday, which allowed D Dhanasekaran’s Tiruppur-based textiles firm — Abi Tex Mills — import machinery from Oman and boost production, has now gone haywire with the Reserve Bank of India’s (RBI) decision to bar banks from issuing guarantees in the form of letters of undertaking (LoUs) and letters of comfort. “My machinery took a year to be imported and has been installed in the factory for a few months now. But now with buyer’s credit cancelled, I am focused on how to make payments instead of my production,” Dhanasekaran said.

Continue reading Reserve Bank’s decision to ban LoUs will badly Impact SME

Reuters: Indian importers face funding crunch with clampdown on credit guarantees

Article in Reuters printed with permission: 

Continue reading Reuters: Indian importers face funding crunch with clampdown on credit guarantees

Bank Audit – Buyers Credit and Nostro Account

A bank branch goes through four kinds of audits and inspection

  • Internal audit (done by bank staff) on regular basis
  • Concurrent audit (done by a third party), on monthly or quarterly basis
  • Statutory audit (done by the statutory auditor) on quarterly basis
  • Inspection by RBI (annual basis).

In relation to buyers credit transaction, below are the few audit point which are covered by above audits.

Continue reading Bank Audit – Buyers Credit and Nostro Account

Implication on Buyers Credit because of PNB Fraud

Latest Articles:

  1. RBI Stops Buyers Credit Transactions (LOU & LOC)
  2. Indian Banks adds Additional Control to SWIFT System
  3. Bank Audit – Buyers Credit and Nostro Account

This article gives layman summary of the PNB fraud case and its impact on buyers credit product and various stake holders like Indian Bank Overseas Branches, Local Banks in India and Importers.

Continue reading Implication on Buyers Credit because of PNB Fraud

Post Libor World – Impact on Buyers Credit

In earlier article we have discussed about various aspect of Libor and its Impact on buyers credit transaction.

In brief, Libor attempts to answer a fundamental question: What is the  cost of money? It does this for a range of currencies (dollars, euros,  pounds, etc.) and for a range of maturities.

Continue reading Post Libor World – Impact on Buyers Credit

Subsidy under CLCSS Cannot be Claimed Where Buyers Credit is Availed

Trigger for this topic is a question that a reader asked:

“MSME manufacturing  unit doing expansion of machinery by purchasing machinery from abroad   get credit linked capital subsidy scheme (CLCSS) from Central Government.

MSME unit avails buyers credit for payment to overseas buyer and sanctioned term loan is not utilised . Can the unit be eligible for subsidy? ”

Below article gives basic details about Credit Linked Capital Subsidy Scheme and revert to above query.

Continue reading Subsidy under CLCSS Cannot be Claimed Where Buyers Credit is Availed

Permitted Methods of Import Payment

The trigger for this topic is a question that a reader asked:

Since Foreign Trade Policy allows imports in INR (Indian Rupees) also, what are the regulations related to buyer’s credit in respect of an import invoice which is in INR ?

Above question is more of an academic question as INR denominated import transaction are very limited but it will help in throwing light on concept of permitted methods of import payment.

Continue reading Permitted Methods of Import Payment

Relationship Management Application (RMA) and Buyers Credit

Using Swift Codes Banks and Financial Institutions send and receive swift messages. But there must have been times where you might have come across your bankers coming back to you stating that they do not have swift key arrangement with buyers credit bank. Thus they will not be able to send Letter of Undertaking (LOU) / Letter of Comfort (LOC) authenticated swift message (MT799) to buyers credit bank. Below article gives a brief about why situation arise.

Continue reading Relationship Management Application (RMA) and Buyers Credit

Myanmar Economic Sanctions – Background, Recent Relaxation & Trade Finance

Myanmar has been under various international economic sanction for more than a decade, which has crippled its international trade. Below article gives a background of economic sanctions on Myanmar, recent relaxations in these sanctions and what will be its likely impact on trade finance from Indian importers perspective.

Continue reading Myanmar Economic Sanctions – Background, Recent Relaxation & Trade Finance

Pushing the reset button on LIBOR – Speech by Martin Wheatley

Note: Since this article was written, below regulation has been implemented. Also Refer Article: Change in LIBOR Tenures and Impact on Trade Finance

Mr. Martin Wheatley – Managing Director, FSA, and CEO Designate, FCA – gave a speech at the Wheatley Review of LIBOR. It contain details on various issues in relation to LIBOR and his final recommendation of rectifying the same. It is worth reading, thus sharing with you complete speech below.

Continue reading Pushing the reset button on LIBOR – Speech by Martin Wheatley

Basel III – Future Impact of Trade Finance

The Basel Committee on Banking Supervision (BCBS, or Basel Committee) is an institution created by the central bank Governors of 27 members from both developed and emerging economies. The most influential publications by the BCBS are Basel Accords. The key part of  Basel framework as commonly referred to, guides banking industry how to calculate risk-weighted assets (RWA) and capital requirements. The Basel Committee gave its  final text of Basel III on Dec 2010 of details of updated global regulatory standards on bank capital adequacy and liquidity, which was agreed by the Governors and Heads of Supervision, and endorsed by the G20 Leaders at their November 2010 Seoul summit.

Continue reading Basel III – Future Impact of Trade Finance

IMO Number and Its importance in case of Buyers Credit

What is IMO Number ?

The IMO ship identification number is made of the three letters “IMO” followed by the seven-digit number assigned to all ships by IHS Fairplay when constructed. This is a unique seven digit number that is assigned to propelled, sea-going merchant ships of 100 gross tons and above. It serves the purpose of identifying ships. It is a Unique number which does not change, even if when the ship’s owner, country of registry or name changes.

Continue reading IMO Number and Its importance in case of Buyers Credit

OFAC Countries & Implication on Buyers Credit

What is OFAC Sanctions ?

  • The Office of Foreign Assets Control (OFAC) is an office of the Treasury Department of United States of America (US).
  • OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, organizations, entities, and individuals.
  • Regulations issued under Trading With the Enemy Act (50 U.S.C. App.§§ 1-44) or by the US President under authority delegated under the International Emergency Economic Powers Act.
  • The OFAC sanctions programs are implemented through restrictions on imports and exports, prohibitions on financial transactions, freezing of assets, and other means.

Continue reading OFAC Countries & Implication on Buyers Credit

Buyers Credit All-In-Cost Ceiling may move back to L+200bps from 01/04/2012

In its Circular dated 15/11/2011, RBI had increased the all-in-cost ceiling for Buyers Credit  from 6 Month L+ 200 bps to 6 Month L + 350 bps subject to condition that is only upto 31/03/2012 and after subject to review there after.

Continue reading Buyers Credit All-In-Cost Ceiling may move back to L+200bps from 01/04/2012

LIBOR Rates: Brief, History, Currencies, Maturities

Post below article there has been change in Libor Guidelines. Refer article “Impact of Libor Review on Trade Finance in India” & “Pushing the reset button on LIBOR – Speech by Martin Wheatley

LIBOR in brief

LIBOR stands for London InterBank Offered Rate. LIBOR is an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Although reference is often made to the LIBOR interest rate, there are actually 37 different LIBOR interest rates. LIBOR is calculated for 7 different maturities and for 5 different currencies. The official LIBOR interest rates (bbalibor) are announced once a day at around 11:45 a.m. London time by Thomson Reuters on behalf of the British Bankers’ Association (BBA).

Continue reading LIBOR Rates: Brief, History, Currencies, Maturities