CII pitches for reintroduction LoUs

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CII President Shobana Kamineni today urged the Reserve Bank to reintroduce the letters of understanding (LoUs) as an instrument of trade credit to businesses facing liquidity crunch.

During her meeting with RBI Governor Urjit Patel here, she also made a case for maintaining status quo in the key policy rate (repo rate).

Following the scam in PNB, allegedly committed by jewellery designer Nirav Moid and associates through fraudulent LoUs, the RBI had stopped banks from issuing the instrument for trade credit for imports into India.

"The decision of the RBI to ban LoUs is impacting genuine importers by squeezing their liquidity, raising their borrowing cost and in turn putting pressure on the rupee. The traders who have been conducting business through these instruments will now have to necessarily shift their transactions to letters of credit and bank guarantees," a CII release said quoting her.

She said that due to stopping LoUs, the cost of credit may go up, especially for the small and medium enterprises.

The small players, she added, are already under pressure owing to slow GST refund and therefore, stopping of LoUs is like a double whammy.

"The reintroduction of LoUs and Letters of Comfort would help manufacturers in undertaking cost-effective production for both the domestic and export markets," said the CII head.

Kamineni said the central bank should continue to provide the requisite policy support which would enable industry to raise capital at affordable cost and support the turnaround in the economy.

"There are enough indications that the green shoots of recovery are gathering traction in the economy and a policy action by the RBI which would refurbish business sentiment, support domestic demand and trigger the turn of the investment cycle is very much required," she said.

The CII chief was of the view that the RBI should continue to maintain a status quo on the policy rate as indicators of inflation have started coming down. She said that with CPI inflation hovering at around 4.5 per cent, there is scope for the cost of credit to moderate.

Under the circumstances, a status quo in rates would address the upside risks to inflation while meeting the collective aspirations of growth.

The six-member Monetary Policy Committee (MPC) headed by Patel would meet on April 4 and 5 here to decide the first bi-monthly monetary policy review.