In the midst of continued financial turmoil in the banking sector, it appears that it is now becoming harder to obtain letters of credit (L/Cs) for trade finance purposes.

Indian banks are reportedly reviewing their L/C exposures to international financial institutions, while reports from the US say that goods are piling up in ports because L/Cs are hard to come by.

Indian review

According to associate director of PwC, Robin Roy, most Indian banks are reviewing all their direct and indirect exposure to foreign banks with respect to trade financing.

However, he adds that the ultimate risk in the case of L/C transactions rests with the overseas importer and, unless the importer itself is in financial trouble, the danger may not be grave.

"There is no international commercial bank that will dishonour an L/C, as they are not facing any threat of liquidation, but Indian banks have to be careful on fresh outflows and expenditure due to the ongoing uncertain environment in the financial sector," advises principal of McKinsey's financial institutions practice in India, Joydeep Sengupta.

US shortage

An L/C shortage is also reported in the US. "There's all kinds of stuff stacked up on docks right now that can't be shipped because people can't get letters of credit," Bill Gary, president of Commodity Information Systems in Oklahoma City reportedly said.

The problem is finding lenders prepared to extend credit he added.

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