The RBI's decision to ban letters of undertaking (LoU) for trade finance in the wake of the Punjab National Bank fraud will severely impact at least in the immediate term on the capital goods industry,  as small businesses would require higher working capital, said the Process Plant and Machinery Association of India (PPMAI).

PPMAI, the apex body of capital goods manufacturer’s Industry.

"RBI’s banning of these instruments would result into increasing working capital requirement of industries as per their trade cycle and will disrupt trade, services and industry particularly MSMEs whose working capital is based as per their trade cycle, will require higher working capital or else suffer irreparable losses,”  said Mr Yatinder Pal Singh suri , chairman, PPMAI.

"Capital Goods industry mostly depends on imports and exports of goods, the industry which has been conducting business through these two instruments will now have to necessarily shift their transactions to Letters of Credit (LoCs) and bank guarantees," said Suri.

"RBI moves looks like more of punishment to entire industry  for fraud of select few and corruption in banking system. This Move will also  raise the cost of borrowing especially for small importers, slow the pace of imports. Capital good importers are already hurt by various anti dumping duties put by the government on various  in put products including stainless steel," he said.

"This will lead to undue stress on the working capital management and moves contrary to the stated objective of achieving ease of doing business.  With an output of INR 2,50,000/- crores contributing 2% of the GDP and generating 10 million jobs, this capital goods sector is on the cusp of expansion. Recognizing the same, the  Government of India has mandated the Capital Goods Policy with an aim to increase the output to INR 7,50,000/- generation of 30 million jobs by 2025.  As such, the banning  of LOU is contrary to all the aforesaid and creates hurdles in achieving the stated objectives," said Suri.

"PPMAI urges RBI and ministry of Finance to immediately lift the ban and allow Capital goods industry back bone of Indian economy to survive and prosper," he added.