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)
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.
"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.
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