India's public sector banks (PSBs) remain wary of dealing with Chinese banks in letter of credit (L/C) transactions according to a report in a well-regarded financial daily.

The Hindu Business Line (HBL) quotes several bankers, some of whom reportedly say they prefer to deal only with those Chinese banks listed in the international Bankers' Almanac.

Prudence not profits

One banker told HBL that while he was keen to develop business with participants in China's burgeoning economy, he "will not throw prudence to the winds for profits".

Indian exporters already say they have incurred losses because Chinese banks have reneged on their L/C commitments. India's steel industry has been a particular target for L/C defaults made by Chinese banks (DC World News, 14 July 2005).

Bankers' Almanac

According to HBL, the bankers said that they preferred dealing only with those Chinese banks listed in the international Bankers' Almanac, which provides bankers with information on the global banking system.

The almanac lists around 200 Chinese banks but not all are acceptable to India's PSBs. India's domestic banks meanwhile accept only about four or five Chinese banks' L/Cs according to the HBL report.

Causes for caution

Several reasons for a cautious approach to Chinese banks include a high level of non-performing Chinese assets and a lack of transparency in the banking and accounting systems adopted in the banking and commercial sectors.

The primary reason why banks are reluctant to accept Chinese L/Cs according to the bankers canvassed by HBL, however, was exporters' lack of confidence in their Chinese importing customers.

Discounting fears

Some deals have been written using L/Cs issued by international banks operating in both India and China, but even this level of comfort is not apparently sufficient for bankers to begin discounting export bills to China on a non-recourse basis according to the financial daily.

Bankers are, however, willing to discount import bills to the US or Europe on a non-recourse basis, says HBL.

Bilateral trade between India and China is reckoned to be worth more than US$15

billion per year and growing at about 40 per cent each year.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.