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The Effect Of RBI’S LoU Ban On Small Enterprises

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After the infamous Nirav Modi scam came to light, the RBI on March 14 decided to put a ban on LoUs – Letter of Understanding

What is LoU?

A Letter of Understanding (LoU) is a bank guarantee using which a customer can borrow money in the form of short-term credit from another Indian bank’s foreign branch abroad. This guarantee serves as proof that in case the customer cannot repay the loan, the issuing bank would assume full responsibility. Using LoUs, many importers could borrow loans abroad at a lower ban rate.

This ban has, however, put many small and medium enterprises in jeopardy.

SMEs Have Always Depended On LoUs To Meet Their Working Capital Requirements

In order to reduce their borrowing costs, importers in the past have mostly used buyer’s credit (LoUs) to meet their working capital needs. That’s because the cost of borrowing is linked to the London Interbank Offer Rate which is much more cost-effective.

According to the Hindu Businessline, as of March 31, 2017, the total outstanding buyer’s credit of the top 160 importers was over ₹330 billion. Out of which ₹312 billion of the credit was availed by large-sized importers, followed by small- and medium-sized importers (₹19 billion).

Further, they’ve also stated that the level of dependency on such buyer’s credit is inversely related to annual turnover of an importer. This means that if turnover is less, their dependency is more and vice versa. So small and medium-sized importers depend heavily on these LoUs and the ban on these might lead to sudden liquidity pressure and high funding costs for them. While large players can easily overcome this hurdle with alternative funding options, smaller players will find it difficult to secure funding.

Also Read: FACTORS TO CONSIDER BEFORE CHOOSING AN ONLINE SELLING PARTNER

What Some People Have To Say About This

President of Small & Medium Business Development Chamber of India, Chandrakant Salunkhe said, “Banning of LoUs will severely impact the SME sector as it was an important credibility building option for the smaller players.”

Nikunj Turakhia, President of Steel Users Federation of India, stated that this sudden ban by RBI will exert tremendous pressure on importers who have availed the facility because they will now have to shell out the entire money upfront. Usually, importers avail 90 days credit through Lou for which they are charged a margin at the rate of Libor (London Inter-bank Offered Rate) plus 1.5 – 2% besides submitting sufficient collateral.

Sandeep Parikh, Vice-President, Chamber of Small Industry Association, said that the small-scale units will face a liquidity crunch as payments from medium and large units will be delayed due to sudden cancellation of Lou. In all, about 10% of the small-scale units would be eligible and be using the Lou facility as buyers credit, he said.

Ganesh Kumar Gupta, Managing Director, Akash Textiles, and President, Federation of Indian Export Organisations, said “Since most exporters are using Letter of Credit and Bank Guarantees, which are relatively safe, the move will not have much adverse bearing on exports. However, this may slightly increase the cost as such instruments are costlier by about 0.5-1%.”

Rajesh Mehta, Executive Chairman, Rajesh Exports, one of the largest jewellery exporters, said that the knee-jerk reaction of the RBI has left scores of exporters in the lurch.

After receiving these representations from various corporates and banks against this sudden ban, the Finance Ministry has asked the RBI to give some breathing space to businesses to help them out.

Why SMEs Are Most Affected By This Ban

1. Their turnovers have declined: Chemtrols, which is a Mumbai-based industrial equipment manufacturer catering to oil refineries and fertiliser companies, expect its turnover to fall to ₹250 crore this fiscal from ₹350 crore logged in 2016-17. One of the reasons for this decline is due to the company’s business taking a toll after the ban because their cost of finance has risen from 5% to 13% post this ban.

2. It is difficult to get foreign financing: According to CFO of Raajratna Metal, before the LoU ban, foreign funds were accessible at 2.5% per annum but now the rate has become 10% per annum. Initially, they’d get $5-10$ mn through the LoUs but now the cost of these funds have risen massively as reported by the Hindi BusinessLine.

3. They have to cut down on raw material sourcing: Initially, for raw materials, companies would use Lou’s for 180 days at a low rate but now since procuring loans has become expensive companies need to resort to cost-cutting.

4. Doing business has become tougher: For borrowing loans companies need to submit collateral, go through strict processes and submit a lot of paperwork after the scam. All this has made business tough rather than easy! And people are questioning the entire ‘ease of doing’ business agenda.

Big companies can easily overcome the above problems but who will rescue the smaller fish in the pond? Can Fintech companies like FlexiLoans come to the rescue of these SMEs and solve their crisis? Will such SMEs resort to non-banking financial companies to solve their working capital needs, or will the RBI provide some relief to the genuine borrowers?

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An ambassador and trained facilitator under Eco Femme (a social enterprise working towards menstrual health in south India), Sanjina is also an active member of the MHM Collective- India and Menstrual Health Alliance- India. She has conducted Menstrual Health sessions in multiple government schools adopted by Rotary District 3240 as part of their WinS project in rural Bengal. She has also delivered training of trainers on SRHR, gender, sexuality and Menstruation for Tomorrow’s Foundation, Vikramshila Education Resource Society, Nirdhan trust and Micro Finance, Tollygunj Women In Need, Paint It Red in Kolkata.

Now as an MH Fellow with YKA, she’s expanding her impressive scope of work further by launching a campaign to facilitate the process of ensuring better menstrual health and SRH services for women residing in correctional homes in West Bengal. The campaign will entail an independent study to take stalk of the present conditions of MHM in correctional homes across the state and use its findings to build public support and political will to take the necessary action.

Saurabh has been associated with YKA as a user and has consistently been writing on the issue MHM and its intersectionality with other issues in the society. Now as an MHM Fellow with YKA, he’s launched the Right to Period campaign, which aims to ensure proper execution of MHM guidelines in Delhi’s schools.

The long-term aim of the campaign is to develop an open culture where menstruation is not treated as a taboo. The campaign also seeks to hold the schools accountable for their responsibilities as an important component in the implementation of MHM policies by making adequate sanitation infrastructure and knowledge of MHM available in school premises.

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Harshita is a psychologist and works to support people with mental health issues, particularly adolescents who are survivors of violence. Associated with the Azadi Foundation in UP, Harshita became an MHM Fellow with YKA, with the aim of promoting better menstrual health.

Her campaign #MeriMarzi aims to promote menstrual health and wellness, hygiene and facilities for female sex workers in UP. She says, “Knowledge about natural body processes is a very basic human right. And for individuals whose occupation is providing sexual services, it becomes even more important.”

Meri Marzi aims to ensure sensitised, non-discriminatory health workers for the needs of female sex workers in the Suraksha Clinics under the UPSACS (Uttar Pradesh State AIDS Control Society) program by creating more dialogues and garnering public support for the cause of sex workers’ menstrual rights. The campaign will also ensure interventions with sex workers to clear misconceptions around overall hygiene management to ensure that results flow both ways.

Read more about her campaign.

MH Fellow Sabna comes with significant experience working with a range of development issues. A co-founder of Project Sakhi Saheli, which aims to combat period poverty and break menstrual taboos, Sabna has, in the past, worked on the issue of menstruation in urban slums of Delhi with women and adolescent girls. She and her team also released MenstraBook, with menstrastories and organised Menstra Tlk in the Delhi School of Social Work to create more conversations on menstruation.

With YKA MHM Fellow Vineet, Sabna launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society. As a start, the campaign aims to begin conversations on menstrual health with five hundred adolescents and youth in Delhi through offline platforms, and through this community mobilise support to create Period Friendly Institutions out of educational institutes in the city.

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A student from Delhi School of Social work, Vineet is a part of Project Sakhi Saheli, an initiative by the students of Delhi school of Social Work to create awareness on Menstrual Health and combat Period Poverty. Along with MHM Action Fellow Sabna, Vineet launched Menstratalk, a campaign that aims to put an end to period poverty and smash menstrual taboos in society.

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A Computer Science engineer by education, Nitisha started her career in the corporate sector, before realising she wanted to work in the development and social justice space. Since then, she has worked with Teach For India and Care India and is from the founding batch of Indian School of Development Management (ISDM), a one of its kind organisation creating leaders for the development sector through its experiential learning post graduate program.

As a Youth Ki Awaaz Menstrual Health Fellow, Nitisha has started Let’s Talk Period, a campaign to mobilise young people to switch to sustainable period products. She says, “80 lakh women in Delhi use non-biodegradable sanitary products, generate 3000 tonnes of menstrual waste, that takes 500-800 years to decompose; which in turn contributes to the health issues of all menstruators, increased burden of waste management on the city and harmful living environment for all citizens.

Let’s Talk Period aims to change this by

Find out more about her campaign here.

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A former Assistant Secretary with the Ministry of Women and Child Development in West Bengal for three months, Lakshmi Bhavya has been championing the cause of menstrual hygiene in her district. By associating herself with the Lalana Campaign, a holistic menstrual hygiene awareness campaign which is conducted by the Anahat NGO, Lakshmi has been slowly breaking taboos when it comes to periods and menstrual hygiene.

A Gender Rights Activist working with the tribal and marginalized communities in india, Srilekha is a PhD scholar working on understanding body and sexuality among tribal girls, to fill the gaps in research around indigenous women and their stories. Srilekha has worked extensively at the grassroots level with community based organisations, through several advocacy initiatives around Gender, Mental Health, Menstrual Hygiene and Sexual and Reproductive Health Rights (SRHR) for the indigenous in Jharkhand, over the last 6 years.

Srilekha has also contributed to sustainable livelihood projects and legal aid programs for survivors of sex trafficking. She has been conducting research based programs on maternal health, mental health, gender based violence, sex and sexuality. Her interest lies in conducting workshops for young people on life skills, feminism, gender and sexuality, trauma, resilience and interpersonal relationships.

A Guwahati-based college student pursuing her Masters in Tata Institute of Social Sciences, Bidisha started the #BleedwithDignity campaign on the technology platform Change.org, demanding that the Government of Assam install
biodegradable sanitary pad vending machines in all government schools across the state. Her petition on Change.org has already gathered support from over 90000 people and continues to grow.

Bidisha was selected in Change.org’s flagship program ‘She Creates Change’ having run successful online advocacy
campaigns, which were widely recognised. Through the #BleedwithDignity campaign; she organised and celebrated World Menstrual Hygiene Day, 2019 in Guwahati, Assam by hosting a wall mural by collaborating with local organisations. The initiative was widely covered by national and local media, and the mural was later inaugurated by the event’s chief guest Commissioner of Guwahati Municipal Corporation (GMC) Debeswar Malakar, IAS.

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