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.