It is really eye opener that bank like State Bank have decided to stop discounting bill on LC i.e. Letter of Credit . It only tells about how much tight liquidity SBI is facing. .This is nothing but alarm bell for SBI and other banks where position is more critical and more dangerous than SBI. Message for Foreign investors is clear . Message for exporters and importers is clear . And such drastic action by SBI will not only affect business of the country , not only affect bank's image but adversely affect the image of the country too. I hope at least now RBI will take drastic steps to correct HR management and improve health of assets of the bank .
Liquidity crunch: SBI stops discounting LCs issued by other banks-
ET 23rd September 2013
MUMBAI: Is the country's largest lender,State Bank of India(SBI), battling a liquidity crunch? So goes the murmur among senior bankers who got a whiff of an unprecedented decision taken by SBI last week.
SBI has directed its offices to stop discounting letters of credit (LC) other than those opened by SBI and its associate banks, which together command 25% of the local banking business.
The move could hurt business because LC discounting is the lifeblood of local and cross-border trade. LCs enable buyers to take delivery of goods without upfront payment and sellers to receive immediate payment soon after goods are shipped.
The buyer's bank opens the LC and the seller's bank discounts it - a transaction where a small percentage is deducted by the seller's bank as processing charge, fees and interest cost before paying the seller. Such trade finance facility assumes greater significance in a tight credit cycle and slow economy. Since buyers typically take at least three to six months to cough up money and sellers are unwilling to wait that long, banks play a crucial role in financing both parties.
In an internal circular dated September 19, SBI informed branches concerned to discontinue discounting LCs opened by banks other than those issued by SBI and associates with immediate effect. An SBI insider said even though the communique mentions all LCs, the decision may be eventually restricted to inland trades and is unlikely to impact exporters.
Move Could be Aimed at RBI
"It's due to liquidity constrains," SBI Chairman Pratip Chaudhuri told ET. Asked whether this was a temporary measure, he said, "It depends. We don't know if measures taken by RBI are temporary... It's a question of availability of funds." Chaudhuri's statement indicates that till the liquidity situation improves, the bank would stick to existing customers of SBI group while providing trade finance.
Till now, SBI was discounting LCs issued by most banks.
Recently, the bank had raised deposit rates to attract more funds. Last week, it raised the returns on 179-day and one-year deposits by one percentage point while earlier this month, it had raised interest rates on short-term bulk deposits by more than 2 percentage points. The bank is also dealing with higher loan demand as borrowers switched from other banks attracted by its lower base rate.
SBI has directed its offices to stop discounting letters of credit (LC) other than those opened by SBI and its associate banks, which together command 25% of the local banking business.
The move could hurt business because LC discounting is the lifeblood of local and cross-border trade. LCs enable buyers to take delivery of goods without upfront payment and sellers to receive immediate payment soon after goods are shipped.
The buyer's bank opens the LC and the seller's bank discounts it - a transaction where a small percentage is deducted by the seller's bank as processing charge, fees and interest cost before paying the seller. Such trade finance facility assumes greater significance in a tight credit cycle and slow economy. Since buyers typically take at least three to six months to cough up money and sellers are unwilling to wait that long, banks play a crucial role in financing both parties.
In an internal circular dated September 19, SBI informed branches concerned to discontinue discounting LCs opened by banks other than those issued by SBI and associates with immediate effect. An SBI insider said even though the communique mentions all LCs, the decision may be eventually restricted to inland trades and is unlikely to impact exporters.
Move Could be Aimed at RBI
"It's due to liquidity constrains," SBI Chairman Pratip Chaudhuri told ET. Asked whether this was a temporary measure, he said, "It depends. We don't know if measures taken by RBI are temporary... It's a question of availability of funds." Chaudhuri's statement indicates that till the liquidity situation improves, the bank would stick to existing customers of SBI group while providing trade finance.
Till now, SBI was discounting LCs issued by most banks.
Recently, the bank had raised deposit rates to attract more funds. Last week, it raised the returns on 179-day and one-year deposits by one percentage point while earlier this month, it had raised interest rates on short-term bulk deposits by more than 2 percentage points. The bank is also dealing with higher loan demand as borrowers switched from other banks attracted by its lower base rate.
A few senior officials of private banks and financial institutions ET spoke to felt that even though liquidity is an issue, SBI's move could be partly aimed at putting pressure on RBI to ease the liquidity situation.
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