Restore LoUs at the earliest with proper safeguards, RBI told
Letters of undertaking (LoUs) and letters of comfort (LoC) were banned after they were misused by Nirav Modi and Mehul Choksi to perpetrate the PNB fraud
New Delhi: A parliamentary panel on Monday asked the Reserve Bank of India to restore letters of undertaking (LoUs)—banned after their misuse in the ₹ 14,000 crore PNB fraud—at the earliest with proper safeguards in order to increase the availability of credit for traders. The Parliamentary Standing Committee on Commerce said in its report that the ban on letters of undertaking and letters of comfort (LoC) resulted in rise in the cost of credit by 2-2.5%.
According to the parliamentary panel, the LoU ban would certainly affect the cost competitiveness of India’s trade and industry and have a cascading effect on jobs and loss of jobs—something the country can ill afford. The committee stated that RBI should have engaged more in consultations with stakeholders on the matter before resorting to discontinuation of LoU/LoC.
“It is of the considered opinion that LoU/LoC should be restored at the earliest, albeit with proper safeguards. Its restoration assumes more significance in the face of the fact that the content of imports is over 20% of India’s total exports,” the parliamentary panel said in its report Impact of Banking Misappropriation on Trade and Industry.
The committee said that in present times, when the currency is witnessing high depreciation, it is imperative that the cost of credit for imports must be minimal. “The ban on LoU/LoC takes away the benefit of cheap source of funds availed by the importers. Costly imports shall lead to higher costs of production and erode the competitiveness of the domestically produced goods,” it said.
Discontinuation of LoU/LoC as a response to fraud and misappropriation has set in a contagion of conservatism in banking sector. “The caution has inadvertently made banks becoming inaccessible to MSME sector...such an approach has the dangers of making banking services elitist and subservient to a few large corporates leaving out the vast majority of MSME units which are not able to measure to the standards and parameters laid down by external credit rating agencies for getting AAA or AA ratings,” the parliamentary panel said.
RBI had in March banned issuance of LoUs and LoC, used extensively for trade finance, after the PNB fraud surfaced. Billionaire jeweller Nirav Modi, his uncle Gitanjali Gems promoter Mehul Choksi and their associates used the guarantees to defraud the bank of nearly $2 billion.
PTI contributed to this story.
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