Too drastic a solution: Ban on letters of undertaking needs to be reviewed

Depriving exporters of LoUs can have a disruptive effect on the buyers' credit market

The Reserve Bank of India (RBI) appears to have overreacted to the Nirav Modi scandal with its decision to discontinue the issue of letters of undertaking (LoUs) and letters of comfort (LoCs). In doing so, it appears to have chosen to throw the baby out with the bathwater. LoUs and LoCs offer exporters, operating on thin margins and hyper-schedules in uber-competitive global markets, a source of cheap and dynamic working capital in a banking system that is clotted with high interest rates and complex procedures. When mobilised legally — with appropriate margin money and bank guarantees logged into the bank’s