PNB fraud: RBI discontinues Letter of Undertaking, Letter of Comfort issuance for trade credit

Last Updated: Wed, Mar 14, 2018 09:24 hrs
RBI (Reuters image)

New Delhi: The Reserve Bank of India (RBI) on Tuesday announced discontinuation of the issuance of Letters of Undertaking (LOUs) and Letters of Comfort (LOCs) for trade credit for imports with immediate effect.

Banks can continue to issue guarantees and letter of credit for trade purposes which are the international norm, and also have features that makes the claim on the issuer strong.

Guarantees and LoCs involve receiving banks conduct their own credit appraisal on companies before accepting them which reduces the risk of defaults, said bankers. On the other hand, the Letter of Undertaking and Letter of Comfort which were banned, led to receiving banks depending completely on the issuing bank on creditworthiness.

The apex bank in its notification said,"It has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category -I banks with immediate effect."

"Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued, subject to compliance with the provisions contained in Department of Banking Regulation Master Circular on "Guarantees and Co-acceptances", as amended from time to time," It added.

The RBI added that the aforesaid Master Direction will be updated to reflect the changes.

However, it mentioned that the changes will be applicable from the date of issuance of the circular.

In the aftermath of Punjab National Bank (PNB) fraud case, a couple of banks had clamped down on the issue of LoUs. 

More from Sify: