Exports won't take a hit due to RBI's move: FIEO prez

New Delhi: Exporters on Wednesday said that the RBI’s move to discontinue Letter of Undertakings (LoU) will not have much impact on overall exports from the country.

“The move will have limited impact as such instruments were being used by about 5 per cent of the importers particularly by large industries in gems and jewellery, metal and petroleum sectors,” said  FIEO president Ganesh Kumar Gupta.

FIEO president said that since most of the exporters are using letter of credit and bank guarantees, which are relatively safe, the move will not have much adverse bearing on exports.

“However, this may slightly increase the cost as such instruments are costlier by about 0.5 per cent to 1 per cent,” said Mr Gupta.

He said that banks should not tighten the liquidity to gems and jewellery sector as the sector is coming back on track due to good order booking from US, Europe, China, Japan as well as demand within the country.

The sector is extremely important as it provides exports to about $43 billion but more importantly gives employment to over 5 million artisans and workers, added Mr Gupta.

However, CII president Shobana Kamineni said that the decision of RBI to discontinue LoUs and Letters of Comfort for trade credit would have a disruptive impact on the buyers’ credit market, in the immediate term.  “The traders who have been conducting business through these two instruments will now have to necessarily shift their transactions to Letters of Credit and Bank Guarantees. The result would be that cost of credit may go up, especially for the SMEs,” she said.

CII said that the RBI could have strengthened and tightened the existing regulations on LoUs and LoCs or could have announced a phasing out mechanism.