State Bank of India says credit cost could rise post-Reserve Bank's LoU ban

On 13 March, RBI decided to discontinue the LOUs in the wake of the Rs 12,600 crore fraud at the state-run Punjab National Bank (PNB)

IANS March 16, 2018 18:53:10 IST
State Bank of India says credit cost could rise post-Reserve Bank's LoU ban

New Delhi: The RBI's decision to discontinue the Letters of Undertaking (LoUs) or Letters of Comfort (LoC) might increase the credit cost for imports as it will lead to a shift towards "other off-balance sheet" products, said a State Bank of India (SBI) report on Friday. According to SBI Ecowrap report, the shift to "other off-balance sheet" products will be "administratively time consuming" and in the short-term might impact export funding as well.

On 13 March, RBI decided to discontinue the system in the wake of the Rs 12,600 crore fraud at the state-run Punjab National Bank (PNB). "Banning LoUs/LoCs might lead to shifting to other off balance sheet products -- LCs, Bank Guarantees, other fund based facilities or on to balance sheet," the SBI Ecowrap report said.

State Bank of India says credit cost could rise postReserve Banks LoU ban

State Bank of India (SBI). Reuters.

"We, however, believe the shift to other off balance sheet products if occurs, will be administratively time consuming. However capital charge may vary for different products leading to changes in capital requirements in either direction depending on the product used and associated risk."

Earlier, banks were permitted to issue guarantee/LoU/LoC in favour of overseas supplier, bank or financial institution up to $20 million per import transaction under the automatic route for a maximum period up to one year in case of import of non-capital goods. As per the latest available RBI data, guarantees given on behalf of constituents outside India stood at Rs 1.95 lakh crore as on 31 March, 2017.

Updated Date:

also read

RBI has 'major concerns' about cryptocurrencies, but no change in position, says Shaktikanta Das
Business

RBI has 'major concerns' about cryptocurrencies, but no change in position, says Shaktikanta Das

The RBI governor's clarification on cryptocurrencies comes less than a week after it set aside a 2018 circular banning their trade

Sensex jumps over 150 points in opening trade; NSE Nifty advances by 0.19%
Business

Sensex jumps over 150 points in opening trade; NSE Nifty advances by 0.19%

PowerGrid, NTPC, ITC were among the top gainers in the Sensex pack, while Bajaj Finserv, HDFC, Asian Paints and Dr Reddy’s were among the laggards

Sensex, Nifty surge to record highs ahead of RBI's monetary policy decision today
India

Sensex, Nifty surge to record highs ahead of RBI's monetary policy decision today

The BSE Sensex opened strong and finished at 382.95 points higher at 52,232.43. Similarly, NSE Nifty soared 114.15 points to end at its lifetime peak of 15,690.35