LoUs should be restored at earliest with safeguards: Par Panel to RBI

A parliamentary panel on Monday asked RBI to restore Letters of Undertaking (LoUs) -- banned after their misuse in the Rs 140 billion PNB scam -- 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 of LoU/LoC has resulted in rise in the cost of credit by 2 to 2.5 per cent.

It said the move would certainly affect the cost competitiveness of country's trade and industry and have a cascading effect on jobs and the loss of jobs is 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 per cent of India's total exports," it said in its report - Impact of banking Misappropriation on Trade and Industry.

In March, Reserve Bank of India banned issuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoC), used extensively for trade finance, following the unearthing of fraud at Punjab National Bank (PNB) that was carried out allegedly by diamond jeweller Nirav Modi and his associates.

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.

It also stated that discontinuation of LoU/LoC as a response to the 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," it said.