Chinese imports: Banks delay issue of LCs, flag SME solvency concerns

  • 06-Jul-2020
  • Chinese imports: Banks delay issue of LCs, flag SME solvency concerns

Owned banks are learnt to have slowed down the rate at which letters of credit (LCs) are issued for payments by Indian companies towards Chinese imports. With Chinese-origin consignments getting stuck at Indian ports, LCs issued by Indian banks are being encashed by the seller, even as Indian companies are unable to receive the imported goods.

Banks are of the view that sustained delays, especially at a time when units are in the process of restarting operations after the lockdown, could impact the solvency of smaller units. This could have a bearing on the repayment of loans taken by these units, banks have communicated, relaying viability concerns flagged by industry players from sectors ranging from auto to pharma and garments to electronics. They are likely to escalate the issue to the Reserve Bank of India and the Ministry of Finance through the Indian Banks Association, sources involved in the exercise said.

Normally, banks issue guarantees on behalf of importers and other customers in favour of beneficiaries abroad. LCs are issued to importers from the domestic branches in India, who guarantee payments to the funding bank of the exporter if the Indian importer fails to make the payment on the due date. An LC enables importers to negotiate good prices in sales contracts, as sellers or exporters receive payment immediately after the shipment.

Banks have turned cautious as reports of consignments being held up at ports continue and duty rates are being revised upwards for certain categories of products. “Goods are held up at ports for ‘inspections’. On the other hand, shipments were done on the basis of guarantees issued by banks. Money has gone to the seller (Chinese exporter) but the goods have not reached the importer (Indian buyer). This can affect the units which imported the material and led to defaults,” said a bank official, justifying the move to delay the issue of fresh LCs against imports from China.

After the skirmish along the Line of Actual Control, Chinese goods have been piling up at multiple Indian ports. These include consignments — both containerised and bulk cargo — where customs duty and GST have been paid but goods have not been released. “Many importers from pharma, auto, chemicals and capital goods sectors have complained. There are reports that duty is likely to be increased and more restrictions will be slapped on imports from China. Banks are turning cautious while extending guarantees for future consignments. We have informed the government about this situation as bad loans are set to rise after the moratorium on loan repayment ends in August,” said a source.

Last year, the value of imported Chinese goods in India was estimated to be $70 billion, mostly electronics, mechanical machinery, chemical and iron and steel goods. Banks have sought the government’s support in speeding up the clearance of import consignments from China, especially inputs for various sectors. The “undue delay” is impacting their operations and might result in further financial losses for manufacturers already grappling with the Covid-19 crisis, they said.

Apparel Export Promotion Council chairman A Sakthivel, in a letter to the Central Board of Indirect Taxes and Customs earlier this month, said that the move by Customs authorities at several ports to undertake 100 per cent examination of goods originating from China, Hong Kong and Taiwan has “created undue delay in clearance of imported shipments of inputs, which are meant for manufacturing garments for exports” and that delay is affecting factory operations and that exporters fear that they “might fail to meet their delivery schedules”.

The India Cellular and Electronics Association (ICEA) has written to the Centre saying the move to check every consignment coming from China is disrupting supply chains and leading to losses, especially when units are restarting operations after a long gap. Apart from the ports, ICEA said its member companies have received word from Chennai, Mumbai and Delhi airports about all China-origin consignments being subject to 100 per cent examination, even though there are “no written orders” by the government.

Pharmexcil has said the drug industry is worried about non-clearance of imported pharma key starting raw materials, intermediates and active pharmaceutical ingredients. “We’ve been inundated with distress calls from a lot of our member companies that there has been an acute disruption in manufacturing of pharmaceutical products over the last three days. Very critical KSMs, intermediates and APIs are not being cleared for reasons not known to the industry at all,” Pharmexil said in a missive to the Centre.

The Indian Drugs Manufacturers Association has written letters to the Chief Commissioner Customs at Nhava Sheva (JNPT Port), and Air Cargo Complex of Mumbai and Ahmedabad.

Banks have said these sudden supply disruptions of pre-contracted cargo could have a detrimental impact on the viability of units across sectors that depend on inputs and intermediate goods from China.

In a letter to Finance Minister Nirmala Sitharaman and Commerce & Industry Minister Piyush Goyal, Road Transport & MSME Minister Nitin Gadkari had said the Union government can think of imposing restrictions on future imports from China, but stalling the release of goods already in Indian ports will hurt Indian business interests, especially those players who had placed their orders before the border clashes between the two countries.

A statement from Chennai Customs Brokers’ Association said there is an internal instruction from Customs to all custodians of cargo including port terminals, airports and all customs freight stations to hold all consignments that have originated from China.

The US India Strategic Partnership Forum said the decision by Customs officials to abruptly halt clearances of industrial consignments coming in from China at major Indian ports and airports has raised concerns among US manufacturers based in India.

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