Bank shares drop as RBI bans LoUs for trade credit for imports

The so-called letters of undertaking, or letters of comfort, for trade credits that were meant for imports had been misused to facilitate a fraud that engulfed Punjab National Bank.

Indian lenders sped up a drop in shares as the Reserve Bank of India (RBI) Said it will no longer allow them to issue a key import-financing tool after the over $2 billion Nirav Modi fraud.

The Reserve Bank of India’s policy change may raise the cost of borrowing for trade-related loans. (Reuters File)

The benchmark S&P BSE Sensex dropped 0.66%,to 33,633.54 as of 11.45 am. Private lender ICICI Bank Ltd. and bigger rival State Bank of India were among the biggest drags on the BSE Sensex, with ICICI Bank trading lower by 1.84%, and SBI down 1.34% at 11.45 am.

State-owned banks are more likely to be hurt than their private peers as the Reserve Bank of India’s policy change may raise the cost of borrowing for trade-related loans, according to Kotak Securities Ltd. The so-called letters of undertaking, or letters of comfort, for trade credits that were meant for imports had been misused to facilitate a fraud that engulfed Punjab National Bank.

“The overall trade credit business contributed 3 to 4% for public banks, which should be at risk,” Kotak said in a note to investors. “Widening spreads in trade credit should augur well for private banks in the short term.”

Punjab National Bank fell 3.5%, Bank of India retreated 3.2% and Canara Bank dropped 3.1%. The three lenders were the worst performers on the S&P BSE 200 Index.

Twelve of the 19 sector indexes compiled by BSE Ltd. declined. The S&P BSE Bankex dropped as much as 1%, while the NSE Nifty PSU Bank Index -- a gauge of 12 state lenders -- fell as much as 2.2%.