MUMBAI : The government and the Reserve Bank of India are considering setting up a dedicated payment mechanism with Sri Lanka to help Indian exporters collect payments in Sri Lankan rupees as the island nation grapples with a deepening economic crisis, two people aware of the matter said.
Talks for a Lankan rupee-Indian rupee payment mechanism were part of discussions during external affairs minister S. Jaishankar’s visit to Sri Lanka this week. The minister’s delegation also included the chief of the Indian Banks Association and representatives of lenders operating in Sri Lanka, including State Bank of India, Indian Overseas Bank and Indian bank.
Under the mechanism, Sri Lankan importers will be allowed to pay for goods to Indian banks in Sri Lanka, and the banks, in turn, would make the payment in Indian rupees to exporters. The payments mechanism will allow Sri Lanka to import goods from India as its dollar reserves shrink, delaying basic imports, including food and fuel.
On Thursday, Sri Lanka extended the duration of daily power cuts to 13 hours as diesel supplies ran out. Food and medicine stocks are also running low.
India is Sri Lanka’s second-largest trading partner, with bilateral merchandise trade amounting to about $3.6 billion. The island nation is unable to meet its debt obligations as it is facing a shortage of foreign exchange reserves, which have plummeted 70% in two years to just $2 billion at the end of February. The reserves can barely cover two months of imports. Meanwhile, the country has foreign debt obligations of about $7 billion this year. “The payments mechanism would be broadly similar to the one India is considering with sanctions-hit Russia. The difference is, we export more to Sri Lanka than import, unlike with Russia, and second, the Lankan rupee is in a free-fall like the ruble did initially," said one of the people cited above, requesting anonymity.
The other difference is bilateral payments will happen through the global financial system SWIFT, since there are no sanctions involved here.
“Indian banks are looking at various modes of support, confirming the letters of credit to Sri Lankan banks, providing counter guarantee, some direct loans, etc. These banks are also examining expansion of branches," the person added.
On 22 February, the Federation of Indian Export Organisations (FIEO) requested the commerce ministry to arrange payment via local currencies to ensure trade between the two countries does not suffer. “We request you to kindly take up the matter with the ministry of finance/RBI to explore the possibility of trading in local currency. If the same is found feasible, we have to consider providing all export benefits on such exports in local currency as has been done with respect to exports to Iran," FIEO said in its letter.
Spokespeople for RBI and the Central Bank of Sri Lanka did not answer emails seeking comment. Separately, Indian banks are also looking at providing support to Sri Lankan banks through guarantees or confirming letters of credit issued by these banks. That said, Sri Lankan banks remain well-capitalized, with both their tier-I and total capital adequacy ratios at 13.2% and 16.5%, respectively. Asset quality also remains stable, with gross non-performing assets as a percentage of total assets at 4.5% as of 31 December.
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However, rating agency Fitch has warned of asset quality pressures in 2022 as the current crisis could threaten borrowers’ repayment capacity.
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