The Hindu Business Line : Steel producers feel the heat as Chinese banks dishonour LCs

STEEL manufacturers exporting to China have found that Chinese State-owned banks are going back on their Letter of Credit (LC) commitments. This is a practice increasingly being adopted by Chinese buyers with support from their banks following the recent decline in global steel prices.

Consequently, these companies are being forced to offer hefty discounts on the price that had been agreed upon at the time of entering into the contract.

Chinese buyers, it is learnt, are forcing Indian companies to renegotiate the price once the consignments reach Chinese ports. If the Indian exporter is reluctant to offer a discount and approaches the bank concerned to encash the LCs, they are being told that the LC is invalid.

In the past few weeks, a number of publicly listed steel companies have faced such a situation and have had no choice but to agree to the discount demanded. Otherwise, their consignment is at risk of being attached by the courts as the importer, Chinese State-owned Minmetal, raises other issues.

Industry sources said that Steel Authority of India Ltd (SAIL) has not yet faced this problem as it insists on LCs from international banks, but private players have not been spared. Moreover, private companies are reluctant to publicise their predicament apprehending that it may "hurt future business interests."

According to Indian exporters, the banks that have gone back on their commitments include Bank of China, Industrial & Commercial Bank of China and China Commercial Bank. The pretext being used by these banks is that discrepancies have crept into the letters that were issued.

Also, in almost all cases, a Chinese version of the LC is attached with the English version of the LC. "The Chinese version has a clause that in case of any dispute the Chinese version would be final, as they are not comfortable with the English language," a senior official in one of the affected companies told Business Line.

"It is also seen that though the shipment made by Indian exporters is under LC, very rarely are the documents 100 per cent as per LC terms. Therefore, even if there is a minor discrepancy, it would require approval/acceptance of the documents by the Chinese buyers as the banks refuse to honour the same," a company official said.

"We would be discussing the problem among ourselves and are planning to take up the issue with the Government as banks cannot simply go back on their LC commitments in case of international transactions," a steel manufacturer said.

"During such circumstances if the product price are downwards, Chinese buyers take advantage of the market situation and demand discount. And then Indian exporters have only two choices: to either recall the goods (which would again attract customs duty) or sell them at a discount, even though the documents are under LC," said the official who is also a board member in the company.

"However, in a reverse scenario if the prices go up, even though the documents may have discrepancies the Chinese buyers accept the documents and make the payment," he said.

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