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Banks write to RBI post LoU ban; seek relief for small and medium enterprises

New Delhi: Several banks have written letter to the Reserve Bank of India (RBI), urging it to look into the problems being faced by the industry following the abrupt ban on Letters of Undertaking (LoUs).
Reserve Bank of India this month banned issuance of LoUs and Letters of Comfort (LoC), used extensively for trade finance, following the unearthing of Nirav Modi fraud case.
Nirav Modi and associates in connivance with some officials of Punjab National Bank (PNB) used LoUs to defrauded the lender of over Rs 13,000 crore.
Asking the RBI to provide some breathing space to them, banks have highlighted that the apex banking uthority should give an alternate option. Banks feel that the sudden banning of LoUs has caused some disruption, which has hit small and medium enterprises.
Banks said that the cost for trade finance has also gone up because of shift to letters of credit. These instruments involve a commission fee along with a so called acceptance charge which is not the case with LoUs as they only involve a guarantee fee.
The Banks said that importers used to seek credit against LoUs at 2.5 percent to 3 percent offshore. However, pots the discontinuation of LoUs, the rate would go upto 11 percent because importers will then have to borrow from local bank branches in India.
Earlier this month, RBI barred banks from issuing guarantees in the form of letters of undertaking (LoU) as it clamped down on the import financing route used by fugitive jeweller Nirav Modi and his uncle Mehul Choksi for allegedly committing India’s biggest bank fraud.
RBI also banned with immediate effect issuance of LoCs which, like LoUs, are used by importers to fund their overseas purchases.
However, letters of credit and bank guarantees will continue upon meeting certain conditions.