Indian banks refuse LCs issued by Pak banks

Fearing that Pakistan is on the verge of a financial meltdown, Indian banks are refusing to accept any letter of credit (LC) issued by the banks there. This in turn has led to a sharp fall in Indian exports to Pakistan.

A senior commerce ministry official said that in the past 10 to 15 days, no export orders to Pakistan had been executed. “The feedback that we are getting is that exports to Pakistan in the past two weeks have come to a standstill,” the official said.

LC is used by exporters to receive payments. For example, an exporter in Pakistan instructs his bank to issue an LC, which can be used by the Indian exporter to realise the payment. But, Indian bankers are not accepting LCs from their Pakistani counterparts, fearing that the Pakistani banks may go bust, and hence, they will not receive the funds.

The official also added that exports to Pakistan through Dubai have also been affected as Indian banks feel that some Dubai-based banks, which issue LCs to Pakistani importers, are also not in a sound financial health.

Indian exporters conduct as much as 40 per cent of their transactions through LCs.

Pakistan imports as many as 2,000 items from India based on the positive list of goods exchanged between the two countries. Key items exported from India include farm products, tyres, auto components as well as chemicals and pharmaceuticals. In 2007-08, India exported goods worth nearly $2 billion to the neighbouring country.

Trade experts point out that the same problem is being seen with banks of other countries. “Indian banks have stopped accepting LCs from less reputed banks from countries like Iran. We have advised Indian exporters to verify from their Indian banks the LCs of the banks of the importer country,” said Ajay Sahai, director general, Federation of Indian Export Organisations (FIEO).

Commerce Minister Kamal Nath also acknowledged the problem regarding LCs in a public function on Saturday.

Commerce ministry officials feel that India may just be able to meet the export target of $200 billion in 2008-09. “Some segments of textiles and the handicraft sector are facing a problem because of lesser orders from markets like the US,” a ministry official said.