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After a brief pause, State Bank of India (SBI) has resumed discounting letters of credit (LCs) issued by other banks. The move is likely to offer relief to the business community, as LC discounting is one of the most popular ways of financing local and foreign trade.
Confirming the development, Chairperson Arundhati Bhattacharya told Business Standard, “We had resumed LC discounting about a week ago.”
Traders prefer LCs as these allow sellers to receive payments immediately after the goods are shipped, while buyers can take deliveries of goods without making any upfront payment. The buyer’s bank issues an LC, which is discounted by the seller’s bank. The seller’s bank charges a small fee, termed the discounting charge.
About a month ago, SBI had directed its offices to suspend the practice of discounting LCs other than those issued by SBI and its associate banks, for local trade. This had led to speculation the state-run lender was facing a liquidity crunch.
Bankers, however, dismissed such theories. “It was a temporary measure, as short-term rates had increased sharply. Our discounting rates are low and it did not make sense to continue LC discounting at such rates for local trades. At the same time, we did not want to raise the rates. Therefore, we decided to suspend it for a temporary period. Now that short-term rates have started easing, we have resumed it,” said a senior SBI executive.
On July 15 this year, the Reserve Bank of India had announced a few measures to tighten liquidity and stem volatility in the foreign exchange rate. Following this, short-term rates started rising. Three-month commercial paper (CP) rates had touched 12 per cent, against the minimum lending rate, or base rate, of banks, which was about 10 per cent.
Bankers said with the hardening of short-term rates, many companies had opted for bank loans instead of borrowing through commercial papers (CPs) or LCs. Therefore, there was drop in demand for these financial instruments. “Probably, this convinced SBI to temporarily discontinue LC discounting,” said a market analyst.
However, with the central bank reducing the marginal standing facility rate 75 basis points last month and deciding to ease some of its liquidity-tightening measures in a calibrated manner, short-term rates have started declining. This had revived the demand for instruments such as CPs and LCs, market participants said.
