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Scrapping of LoUs by RBI will raise cost of credit: CII

IANS  |  New Delhi 

Reacting to RBI's decision to scrap the system of issuing Letters of Undertaking (LoUs) and Letters of Comfort (LoC) by banks in the wake of the Rs 12,600 crore fraud on state-run (PNB), industry body said on Wednesday it would have a disruptive impact on the buyers credit market,

The Reserve of (RBI) on Tuesday discontinued the system of issuing and LoCs by banks for availing trade credits for imports into following last month's unveiling of the fraud by accused diamantaire and his uncle

"The decision of RBI to discontinue Letters of Understanding and Letters of Comfort for trade credit would have a disruptive impact on the buyers' credit market, in the immediate term," said in a statement here.

"The traders who have been conducting business through these two instruments will now have to necessarily shift their transactions to Letters of Credit and Guarantees. The result would be that cost of credit may go up, especially for the SMEs."

feels that RBI could have strengthened and tightened the existing regulations on and LoCs, or could have announced a phasing out mechanism, rather than completely discontinuing a

As per the RBI's latest notification, Letters of Credit and for trade credits can continue to be issued.

are through which a bank allows customers to raise money from another Indian bank's foreign branch as short-term credit.

The scam involved using LoUs issued in favour of the accused by who misused their access to PNB's SWIFT -- the electronic messaging system employed for overseas funds transfers.



(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Wed, March 14 2018. 16:36 IST