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Fugitive jewellers rob Indian business of trade-pricing edge

Central bank's ban on Letters of Undertaking hit smaller enterprises by eroding their margins and competitiveness

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India's gems and jewellery exports in the April-July period have fallen by 1.5 per cent from a year ago to US$13.7 billion.

New Delhi

BANKS were not the only victims of fugitive jewellers Nirav Modi and Mehul Choksi, who allegedly orchestrated a US$2 billion fraud. India's trade may be an unsuspecting casualty.

As the fraud unravelled, the central bank stepped in and banned short-term financing in foreign currency called Letters of Undertaking (LOUs) to limit the damage to the financial system.

The result was the cost of funds for exporters and importers rose as the industry was forced to seek new credit tools, said Ajay Sahai, director general of the Federation of Indian Export Organisations in New Delhi.

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The worst hit are the smaller enterprises as the ban is eroding their margins and competitiveness.

Trade credit is tough to secure after jeweller Modi used fake letters to obtain loans in banks abroad. That threatens to choke shipments of gems and jewellery - the nation's third-biggest export - and widen the trade deficit, which is already the biggest in five years mainly on account of higher oil import bill.

Total gems and jewellery exports in the April-July period fell by 1.5 per cent from a year ago to US$13.7 billion, while imports of precious stones - a key input for exports - dropped by 19.5 per cent to US$9.84 billion during that time.

"The banning of LOUs was a serious blow," said Amitendu Palit, a senior research fellow at the National University of Singapore. "It is not just jewellery exporters that have been affected, but others also. An alternative must be found, such as allowing LOUs with safeguards."

That view was echoed by a parliamentary panel, which in a report last month sought restoration of the trade finance tool at the earliest. The Reserve Bank of India "got unnerved" by the fraud at Punjab National Bank and the ban was a "knee-jerk reaction", it said, while flagging risks for cost competitiveness of trade and the cascading effect on jobs.

The panel was referring to the US$2 billion bank fraud uncovered in February at India's state-owned Punjab National Bank, which accused Modi and Choksi of defrauding it.

The duo have fled the country and are wanted by Indian courts under a new law on fugitive economic offenders that allows authorities to confiscate their assets.

"In case the ban stays, the liquidity pressures on small and medium-sized importers could intensify going forward while also pushing up the effective cost of funds for these players," said Arindam Som, an analyst with India Ratings & Research Pvt.

Though traders still have access to other forms of trade finance such as bank guarantees and letters of credit, the ban on the interim guarantees increases their borrowing costs by about 200 basis points and comes at a huge cost for small traders.

"We all are paying the price for what Nirav Modi did," said Pradeep Goyal, who runs a metal trading company Agsons Agencies.

"We have spent many sleepless nights over this. My cost has gone up, my cycle has reduced and I'm feeling the crunch." BLOOMBERG