Days after the Reserve Bank of India (RBI) banned issue of Letters of Undertaking (LoU) and Letter of Comfort (LoC) much to the chagrin of exporters, a group of leather exporters from Kolkata approached Intesa Sanpaolo — the largest Italian banking group by market capitalisation — to explore the possibility of financial assistance for their imports.

LoUs and LoCs were mostly used for import of raw materials where the bank took an undertaking on behalf of the corporate.

Now staring at a prospect of a near 30-50 per cent drop in exports and increased working capital requirements, leather exporters are looking for alternative fund sources to keep their business going.

Typically, tanners import high quality leather as raw material from which finished leather goods — wallets, gloves and so on — are made.

“Import of raw leather is down by 15-30 per cent and this means export of finished products, too, will be hit. We are anticipating a 30-50 per cent drop in exports,” Imran Ahmed Khan, a member of Committee of Administration for Council for Leather Exports, told BusinessLine .

Funding options

For exporters, the alternative funding options include use of bank guarantees or Letter of Credits (LC).

Typically, bank guarantees and LCs are at least 100-200 basis points (1- 2 per cent) costlier than LoUs and LoCs.

The other alternative is to borrow from unsecured creditors at higher rate of interest.

Khan says both the options are not viable. “Our costs go up even if interest rates move up by 1 per cent. It impacts margins,” he says pointing out that interest expenses (outgoes) is expected to be higher by 18 per cent now.

Cost rise

According to Khan, post demonetisation and implementation of GST, the working capital requirement at tanneries has shot up by least 10 per cent. The latest RBI move further squeezes their cash flows.

To make matters worse, GST refunds to the tune of ₹4,000 crore (for the leather industry as a whole) are pending.

Lay-offs likely

As margins shrink and bottomline take a hit, job cuts may become a reality in the leather industry.

For instance, in the eastern region – which accounts for one-fourth of the country’s leather exports (₹13,000 crore out of ₹45,500 crore) – there are 1,200-odd tanneries employing at least 500,000 people.

At a recent meeting, some city-based tanneries discussed the probability of lay-offs, if finances do not improve.

Ramesh Juneja, President of the Calcutta Leather Complex – an export-oriented industrial area in the eastern fringes of the city that serves a central leather-tanning complex – admits to the worsening scenario.

“A prolonged hit in profit will lead to job-cuts. We intend to approach the West Bengal government for some relief or an intervention,” he said.