Amid Dollar Shortages, Indian Exporters Raise Their Guard
Dollar shortages in some countries of Africa and Latin America have led to higher reliance on Letters of Credit for exporters.
"We have had a case where the customer did not have dollar funds, was not allowed to take delivery of the cargo for weeks and then had to pay demurrage," the chief executive officer of a publicly listed company which manufactures manganese and ferro-alloys, told BQ Prime on the condition of anonymity.
Demurrage is charge payable to the owner of a chartered ship on failure to load or discharge the ship within the time agreed.
The company did not suffer. "But, if the customer had refused to pay due to high demurrage, we would have got stuck and suffered loss as the token advance payment would not have been sufficient to get the cargo back to India," he said, while refusing to disclose the name of the company and the destination of its exports.
Just as the global economy and supply chains were on the mend after the pandemic, a rise in commodity prices, and now, foreign currency outflows from emerging markets, have left some markets facing dollar shortages.
Ever since the pandemic, payments in some countries are not being repatriated on time as these countries are facing difficulty because of an adverse forex reserves situation, Arun Garodia, senior vice chairman of the Engineering Export Promotion Council, said.
"As such, there is more reliance on letters of credit (LCs) — a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount — to ensure risk is minimal and there is surety of payment," he said.
Mahesh Desai, chairman of the EEPC, said there is a rise in economic uncertainty causing increased reliance on LCs by Indian exporters. To be sure, while there are impediments, business is not interrupted, said Desai. "There is no panic."
In Africa, Ethiopia, Ghana, Zambia and a few other countries are facing a forex crunch, while in Latin America, there is some caution in the case of Argentina, Brazil and Venezuela, he said. The rise in oil prices, rise in interest rates and the fallout from Russia's invasion of Ukraine are all factors that contributed to this scenario, Desai said.
Alongside, in countries such as Turkey, movement in the Turkish Lira against the Indian rupee is so adverse that exports are no longer viable, he said.
Arun Shukla, managing partner at Vishwakarma Engineering, a small business in Solan, Himachal Pradesh, said there is increased caution even with exports to neighbouring countries.
While what is happening in Sri Lanka is right in front of us, exports to Bangladesh, Nepal and Pakistan, too, have to be dealt with caution because of concerns and rumours around the health of the country's finances.
Surety of working capital for any SME remains very important, Shukla said. As such, an LC from a world class bank can help avoid payment issues, he added. "Clearly, while work is back to normal for us, several parts of the world are still facing challenges and are not functioning smoothly," Shukla said.
Sharad Saraf, chairman at Technocraft Industries, which exports to over 60 countries globally, however, said that using LCs has been the norm for some time now. For exports to countries like those in Africa, obtaining an LC is a prerequisite for exporters in any case with a number of African countries still not having access to established banking systems. That way, things have not changed much, he said.
The global forex markets are likely to remain volatile, said Ritesh Bhansali, vice president at Mecklai Financial Services. Global inflation, supply bottlenecks and the dollar's strength are all factors that have left weaker economies facing a dollar crunch, he said.
The Reserve Bank of India's additional mechanism for invoicing, payment, and settlement of exports and imports in Indian rupees could help tide over such situations over the medium term.
The RBI's move, when many countries are facing huge foreign exchange shortage in Africa and South America, allowing only export-import transactions through LCs, will help exporters and importers pave the way for trading and settlement of transactions in Indian rupee," said Ajay Sahai, director general and CEO of the Federation Of Indian Export Organisations.