Except PNB, no other public sector bank issued unauthorised LoUs: SBI official

Arun Jaitley

In a notification issued to all banks on Tuesday, the Reserve Bank of India said it has chose to discontinue with immediate effect the practice of issuance of LoUs and letters of comforts (LoCs) for trade credits by banks for imports into India. LoUs and LoCs are instruments issued by Indian Banks to domestic importers to get forex from banks overseas, at a cheaper rate.

The RBI directive is effective immediately. LoUs have always been main source of funding for the industry to avail buyers credit. It is alleged that Modi and Choksi used LoUs far beyond the limit to which they were entitled and in the end defaulted on the payments to PNB.

FIEO president said that since most of the exporters are using letter of credit and bank guarantees, which are relatively safe, the move will not have much adverse bearing on exports. However, banks have sought clarification from RBI for alternative sources of finance to importers and repayment facilities to be provided to borrowers. In a LC-based transaction, the goods are consigned to the order of the issuing bank, meaning that the bank will not release control until the buyer has either paid or undertaken to pay the bank for their guarantee.

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In a statement, Confederation of Indian Industry (CII) president Shobana Kamineni said the move would have a "disruptive impact" on the buyers' credit market, in the immediate term. Traders who have been conducting business through these two instruments will now have to necessarily shift their transactions to LC and Bank Guarantees. Collateral securities, personal guarantees and reasonable margins may be taken to secure the position of banks.

As per the latest available RBI data, guarantees given on behalf of constituents outside India stood at Rs 1.95 lakh crore as on March 31, 2017.

For import of capital goods, the period of guarantee/ Letters of Credit/ Letters of Undertaking by AD can be for a maximum period up to three years. Credit extended by all categories of banks declined during 2016-17. Fee income of Indian banks operating overseas from trade finance related services rose from Rs 1370 crore to Rs 2020 crore in 2016-17, according to RBI data.

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