RBI must resume issuing LoUs, LoCs : parliamentary panel

Why in the news ?
  • The Parliamentary Standing Committee on Commerce said that the RBI must resume issuance of Letters of Undertaking (LoU) and Letters of Credit (LoC) for trade credit.
  • The panel said, the Reserve Bank of India’s decision to discontinue the  LoU was a “knee­-jerk reaction” to the Punjab National Bank fraud case and the  facility should be restored at the earliest.
 
Background
  • The Rs 12,700-crore fraud at Punjab National Bank had prompted the Reserve Bank of India to ban the use of letters (LoUs) and letters of credit (LoCs).
  • LoUs and LoCs are two of the instruments issued by Indian banks to domestic
importers to get foreign exchange from banks abroad at a cheaper rate.
 
Letters of Undertaking (LoUs) :
 
  • An LoU is simply a request made to another bank to loan money to a client.
  • LoU is an assurance given by one bank to another to meet a liability on behalf of a customer.
  • It is similair to a letter of credit or a guarantee.
  • It is used for overseas import remittances and involves four parties — an issuing bank, a receiving bank, an importer and a beneficiary entity overseas.
  • LoUs are conveyed from bank to bank through “Society for Worldwide Interbank Financial Telecommunication” (SWIFT) instructions.
  • The bank that issues the LoU essentially guarantees the bank that receives the LoU request that it stands by the creditworthiness of the borrower. That is, in case of a default, the bank that issued the LoU stands liable to compensate the bank that made the loan to the borrower.
More on news (What panel said)
  • The Committee noted that all the stakeholders it consulted, representing trade and industry, unanimously said that the discontinuation of the LoU and LoC facility had resulted in a 2­ 2.5% increase in the cost of credit. 
  • It said this will affect the cost competiveness of the country’s trade and industry and have a cascading effect on jobs. The loss of jobs is something the country can ill -afford.
  • The Committee said that RBI should have engaged in more consultations with stakeholders on the matter before resorting to discontinuation of LoUs and LoCs.
  • The Committee is of the considered opinion that LoU/LoC should be restored at the earliest albeit with proper safeguards.
Source
The Hindu
 
 
 
Posted by Jawwad Kazi on 7th Aug 2018
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