Letter of credit squeeze – the impact

SA banks, unlike their foreign counterparts, are not targeting letters of credit (LCs) as part of a credit-restraining drive. Any restrictions on the local issuance of letters of credit are purely part of the banks’ general belt-tightening exercises rather than a particular focus. “A disturbing trend is emerging that foreign banks are either limiting or withdrawing completely the advances, overdraft facilities and credit lines to many companies,” Ismail Dadabhay, GM exports at Credit Guarantee Insurance Corporation (CGIC) told FTW. This, he added, has a direct and sometimes disastrous consequence for exporters wishing to trade with those companies, as they now simply have no choice but to renege on payments for the goods they have purchased. “Even if payment was done on a letter of credit,” Dabadhay said, “there is no guarantee that payment will be received locally.” This has chased many foreign companies into receivership or to seek protection from creditors, depending on the legislation of the importing country, leaving the exporter with a potentially irrecoverable bad debt. Dadabhay warns that now is not the time to gamble with payment as there are too many factors influencing business, many beyond the control of the foreign importer, no matter how good the intention is to pay. The shipping lines have also noticed this dearth of letters of credit, but at least one ship’s agent felt that it was a temporary glitch. His line had had a couple of shipments where LCs were not confirmed and the booking had to be cancelled, but it was no major train smash, he said. “And anyway,” he added, “what’s more noticeable, and heartening, is that SA exports seem to be picking up a bit – probably a result, I think, of the recent fall in commodity prices. “I don’t think the scarcity of letters of credit is an on-going problem.” Craig Polkinghorne, global head of structured trade and commodity finance at Standard Bank, agreed that the whole economic crisis and the consequent decline in world trade had made letters of credit scarcer, but this was not a result of a specific credit control at his bank. “Banks across-theboard have tightened up on extending credit, and it’s rather an overall restructuring of credit extension to clients than specifically aiming at single credit products, such as LCs,” he told FTW. “Letters of credit are seen as a more secure form of lending than straight overdrafts, as a result of their direct linkage to a trade flow.”