RBI's ban on Letters of Undertaking to have disruptive impact in immediate term: Corporate India

Industry bodies on Wednesday said RBI's decision to ban Letters of Undertaking (LOUs) for trade credit for imports will have a disruptive impact, at least in the immediate term, as small businesses would require higher working capital

PTI March 14, 2018 16:56:07 IST
RBI's ban on Letters of Undertaking to have disruptive impact in immediate term: Corporate India

New Delhi: Industry bodies on Wednesday said RBI's decision to ban Letters of Undertaking (LOUs) for trade credit for imports will have a disruptive impact, at least in the immediate term, as small businesses would require higher working capital.

In a significant development, the RBI on Tuesday barred banks from issuing guarantees in the form of LoUs and letters of comfort in the wake of nearly $2 billion scam in state-run Punjab National Bank involving jeweller Nirav Modi and his uncle Mehul Choksi.

Ajay Sahai, Director General of exporters' body FIEO opined that RBI's move will have limited impact as LoUs are generally used in gems and jewellery sector and that too by large players.

RBIs ban on Letters of Undertaking to have disruptive impact in immediate term Corporate India

RBI bans Letters of Undertaking (LoUs). Reuters image.

In a statement, CII President Shobana Kamineni said the move would have a "disruptive impact" on the buyers' credit market, in the immediate term. "The traders who have been conducting business through these two instruments will now have to necessarily shift their transactions to Letters of Credit and bank guarantees," said Kamineni.

PHD Chamber President Anil Khaitan said banning of these instruments is not a solution to curb malpractices or scandals. "We know that this move by RBI would result into increasing working capital requirement of industries as per their trade cycle and will disrupt trade, services and industry," said Khaitan. "Industry, particularly MSMEs whose working capital is based as per their trade cycle, will require higher working capital or else suffer irreparable losses," he added.

While RBI has banned LoUs and letters of comfort, letters of credit and bank guarantees will remain available for trade credit. PNB reported fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs 12,967.86 crore, to RBI through its fraud monitoring reporting system.

A multi-agency probe, including by CBI and ED, has been launched into the PNB fraud.

Updated Date:

also read

Charanjit Channi is a dishonest man, says Arvind Kejriwal after raids on Punjab CM
Politics

Charanjit Channi is a dishonest man, says Arvind Kejriwal after raids on Punjab CM

Kejriwal through his comment sought to target the common man image, which Channi has tried to cultivate following his elevation as the chief minister last year

Baby Shark becomes first video on YouTube to hit 10 million views
World

Baby Shark becomes first video on YouTube to hit 10 million views

The likeable children’s song that made an entry on Billboard’s Hot 100 chart earlier, now managed to create another rare milestone by making it the most-viewed video in YouTube’s history.

Budget 2022: Exporters seek support measures to boost shipments
Business

Budget 2022: Exporters seek support measures to boost shipments

The Federation of Indian Export Organisations said the export sector is facing major issues due to rising freight cost and its dependence on global shipping companies