Date:19/08/2005 URL: http://www.thehindubusinessline.com/2005/08/19/stories/2005081902880900.htm

Back PSBs wary of dealing with Chinese banks

C. Shivkumar

The bankers said that they preferred dealing only with those Chinese banks listed in the International Bankers' Almanac.

Bangalore , Aug. 18

CHINA might be the flavour of the season for corporate India, but domestic, public sector banks prefer to remain cautious.

Bankers said that while they were keen to get a slice of the Chinese boom, "we will not throw prudence to the winds for profits." In fact, some Indian exporters have already felt the heat from Chinese banks, which have reneged on their commitments in their letters of credit (LC).

The domestic steel industry has already burnt its fingers as a result of the default in commitments made by Chinese banks in their respective LCs.

The bankers said that they preferred dealing only with those Chinese banks listed in the International Bankers' Almanac.

This Almanac is a document providing bankers with information on the global banking system, credit information and financial research. International bankers have relied on this intensely researched document for the last 150 years.

Cautious bankers, especially public-sector bankers, use this document for due diligence before accepting any LCs from the Chinese counterparts. The Almanac was just one such source, they added. It lists about 200 banks from China. But not all their LCs are accepted by the public sector Indian banks. Any acceptance is done on the basis of the Chinese correspondent bank's financials listed in the Almanac. As a result, at best, only about four or five Chinese banks' LCs are accepted by the domestic banks.

One major reason for this level of caution was the high level of non-performing assets in China. Besides, bankers said that the accounting systems adopted in China were far from transparent and failed to meet up to the standards adopted in India.

Yet, what was foremost in the LC acceptance was the comfort level of domestic exporters with Chinese importers.

"If the exporters have done their due diligence with their importers, that is enough for us," said Mr C.P. Swarnkar, executive director of Punjab National Bank. Big industrial groups with joint venture arrangements have faced little problems in operations.

It was only in the case of first-time exporters/investors that there were problems. Some of these groups have got around the situation by insisting on LCs to be issued by international banks operating in both India and China.

Yet even this comfort was not sufficient for bankers to begin discounting export bills to China on a non-recourse basis. However, they are willing to discount import bills to the US or Europe on a non-recourse basis. This clearly indicated the comfort levels of bankers.

But bankers said that it was not just Indian banks that have faced such rough situations. Even big US and European banks have gone through this process in China, they said.

"But they have gone through the learning curve and we have just started," the bankers said. We have to learn by their experience, they said without impacting the booming bilateral trade.

Bilateral trade between the two countries is now estimated to be over $15 billion per year and growing at about 40 per cent each year.

Moreover, this caution would not come in the way of banks opening more representative offices in that country. Almost all the top PSU banks and one private-sector bank — ICICI bank — have opened representative offices in China.

Banking sources said that as the Chinese banking accounting systems become more transparent, and comfort levels grow, these offices would eventually be upgraded into branches or joint ventures.