The masterminds of an alleged USD 2 billion fraud, fugitive jewelers Nirav Modi and Mehul Choksi, did not just prey on banks but India’s trade too may be one more victim.

As India witnessed the unraveling of the great fraud in the history of India, the RBI stepped in and banned short-term financing in foreign currency technically called as Letters of Undertaking to contain the damage to the financial system. The end result saw the cost of funds for exporters and importers being raised for the industry was compelled to seek new credit tools, said Ajay Sahai, who is the director general of the Federation of Indian export organizations in New Delhi.

The most affected are the small-size enterprises due to the reason that the ban is eroding their margins and competitiveness. Now, for an entrepreneur, trade credit becomes too tough to secure due to jeweler Modi usage of fake letters to obtain loans in banks abroad. And this, in turn, casts doubts of choking up shipments of gems and jeweler which is the nation’s biggest export resulting in the widening of trade deficit. The trade deficit is the biggest now in five years mainly due to higher oil import bill.

In the time period of April-July alone, total gems and jewelry exports fell by 1.5 percent from a year ago to about USD 13.7 billion, while imports of precious stones which form a key input of exports dropped further by 19.5 percent to USD 9.84 billion during that time.

“The banning of LoUs was a serious blow,” said Amitendu Palit, a senior research fellow at the National University of Singapore. “It is not just jewellery exporters that have been affected, but others also. An alternative must be found, such as allowing LoUs with safeguards.”

The same view was echoed by a parliamentary panel, which said in the last month report that it sought restoration of the trade finance tool as early as possible. The Reserve Bank of India was not on its feet when it learned the fraud of Punjab National Bank and the ban was just a “knee-jerk reaction”, it said, while it implied for cost competitiveness of trade and the resulting effect on jobs.

The panel in its report was referring to the USD 2 billion bank fraud revealed in February at Punjab National Bank, due to which Modi and Choksi were found to be the criminals. Now both of them have turned fugitives by fleeing the country and are sought by the courts under a recently introduced law on fugitive economic offenders that gives authorities the power to confiscate their assets.

The ban on the interim guarantees enhances their borrowing costs by about 200 basis points and comes at a big cost for small traders, albeit, traders still can avail other forms of trade finance such as bank guarantees and letters of credit.

“We all are paying the price for what Nirav Modi did,” said Pradeep Goyal, who owns a metal trading company Agsons Agencies (I) Pvt. “We have spent many sleepless nights over this. My cost has gone up, my cycle has reduced and I’m feeling the crunch.”

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