January, 7, 2022
Mumbai: As Sri Lanka grapples with a severe foreign exchange crunch, high street banks in India have turned cautious and selective about their exposures to the island nation.
Several institutions have reduced discounting letters of credit (LC) - the basic instrument for financing trade - issued by many Lanka lenders while others are giving credit to exporters based on the standing of the party, amount, the tenor of the credit, and standing of the bank issuing LCs.
Given the long trade relations, Sri Lanka's dependence on imports and expectations of credit lines (from India and other countries), and possible currency arrangements, bankers hope that the country would be able to tide over the crisis in the medium term.
India's total exports to Sri Lanka was $3.2 billion in 2020. Oil, ships, boats, pharmaceutical products, sugar, iron and steel, cotton and machinery are among the top export items.
Though large MNC banks like HSBC, Citi, and Standard Chartered, which have a long presence in Sri Lanka, continue to extend trade finance with certain precautions, they have the comfort of dealing with their respective Lanka office as the counterparty.
"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.
Banks as well as Indian exporters are awaiting the $1.5 billion line of credit. Of this, it is understood that a $500 million line would be issued by Exim Bank of India to Sri Lanka very soon. "Negotiations are on between India and Sri Lanka over how the money would be used. In all likelihood, the use could be restricted to import of oil and other essentials by Lanka," said a banker. Exim Bank has so far extended 11 credit lines to Sri Lanka aggregating to over $2.12 billion.Since tourism - which suffered badly after the Easter terror attack and the Covid-19 pandemic - has been the prime source of hard currency for Sri Lanka, banking circles think the country may have to enter into other arrangements if a balance of payment problem persists. "Maybe, the kind of deal that exists between India and Nepal. If tourists from India can spend the Indian rupee in Sri Lanka, it would ensure a supply of rupees that could be used to buy stuff from India. But this may have central banking and regulatory implications and can be put in place only after the pandemic is over and travel restrictions are lifted," said another person.
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