Just as India's apparel exporters were beginning to return on the recovery path after a year marked by recession in the US and Europe, the recent bankruptcy filing by the New York-based CIT Group could hit the sector hard.
Although the dust is yet to settle on CIT, a 101-year-old organisation which proceeded with a restructuring to reduce total debt by about $10 billion, the impact could be substantial, as the lender was one of the few to provide 'factor', or short-term, financing to the 2,000 small and mid-sized vendors in India who supply about 300,000 US retailers with merchandise.
With India's apparel exports to the US accounting for over $3 billion annually, the domestic apparel industry could be hit, as nearly 80 per cent of Indian exporters service smaller vendors.
Given Indian apparel manufacturers' very high exposure to the smaller vendors, the impact on Indian firms may be significant. "It is definitely going to impact India's exports to the US, our largest destination, with over 30 per cent share in our total exports. Most important, credit terms may worsen, impacting exporters," a spokesperson for the Apparel Export Promotion Council (AEPC), India's official body of apparel exporters, said on Tuesday.
"Smaller (American) companies will get deeply impacted, specially with the lack of option for financing, given the big chunk that CIT had of this market. As per Standard & Poor's estimate, CIT lent about $4 billion to apparel manufacturers and retailers in the United States in 2008," the spokesperson added.
Considering the Indian apparel industry does over 70 per cent of its business in the second half of the year, since cotton knitwear that comprises a significant chunk of total exports to the US market hits American stores during the summer, the timing of the bankruptcy could double the pain for exporters.
"These are the most critical six months for us. Exporters are either in the middle of executing their order or the consignments are being prepared for shipment. After the last three to four months of stability which had improved confidence, this could have a huge impact on us," said Amit Goyal, president of the Confederation of Indian Apparel Exporters.
Moreover, the lenders' failure could also introduce unwanted uncertainty into the finance cycles of exporters, especially since the letter of credit (L/C) option, which guaranteed payments, has almost been phased out.
"It's now working on a trust-based system, as importers can take up to 60 days to pay. If payments don't come in on time, especially after the CIT bankruptcy, the smaller players with 100-200 machines would be badly affected, as they don't have the money to process future orders. This has been a tough year for exports overall and this could add to the woes," an analyst at retail and consumer goods consultancy Technopak explained.
For January to August, India's apparel export to the US accounted for $2.04 billion, a decrease of 7.23 per cent from the corresponding period of the previous year.
