PHDCCI Seeks Standardisation of Letter of Credit Rules and Increase in MSME Lending Limits

Financial Report

March 16, 2024

Industry Body Flags Concerns to RBI

The PHDCCI (Pharmaceuticals Export Promotion Council of India) has met with RBI Governor Sanjay Malhotra to discuss several key issues impacting the industry. The main concerns raised by the industry body include inconsistent treatment of discrepancies in Letter of Credit (LC) documents by issuing banks and unfair trade practices by rating agencies.

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Letter of Credit Discrepancies

The PHDCCI has highlighted the issue of banks refusing payment even when discrepancies are minor and have been formally waived by the LC applicant. This inconsistent treatment creates uncertainty for suppliers and exporters, undermining the reliability of Letters of Credit as payment instruments. The industry body has requested the RBI to issue clear operational guidelines requiring banks to honor LC documents where discrepancies have been formally waived by the applicant, except in cases involving fraud or material risk.

Credit to MSMEs

The PHDCCI has also called for an increase in the credit to MSMEs through NBFCs limit. The RBI has restored the classification of credit to MSMEs through NBFCs under priority sector but only up to Rs 20 lakh a borrower. With the revision in classification criteria of MSMEs announced in the budget 2025, almost 99 percent of enterprises are now MSMEs, with their turnover limit increasing up to Rs 500 crore. The industry body has requested the RBI to remove the Rs 20 lakh loan limit or increase it to at least Rs 1 crore per borrower.

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Digitalisation and Documentation

The PHDCCI has also requested the RBI to look at introducing uniformity and digitalisation in documentation, which it said is hindering the smooth functioning of the industry. Additionally, the industry body has flagged unfair trade practices by rating agencies, including demanding rating fees for future even when the rating is not required.

Recommendations

The PHDCCI has made several recommendations to the RBI, including:

• Issuing clear operational guidelines for banks to honor LC documents where discrepancies have been formally waived by the applicant
• Prescribing uniform procedures and standardized documentation practices for discrepancy waivers
• Treating credit given by banks to NBFCs for on-lending to MSMEs as indirect finance to MSMEs eligible for classification under priority sector lending
• Removing the Rs 20 lakh loan limit or increasing it to at least Rs 1 crore per borrower
• Introducing uniformity and digitalisation in documentation
• Stopping unfair trade practices by rating agencies, including demanding rating fees for future even when the rating is not required.