RBI must resume issuing LoUs, LoCs, says parliamentary panel

• The Reserve Bank of India’s decision to discontinue the issuance of Letters of Undertaking (LoU) and Letters of Credit (LoC) for trade credit was a “knee-jerk reaction” to the Punjab National Bank fraud case and the facility should be restored at the earlier, the Parliamentary Standing Committee said in a report tabled in the Rajya Sabha.

• The Committee also noted that all the stakeholders are consulted, representing trade and industry, unanimously said that the discontinuation of the LoU and LoC facility had resulted in a 2-2.5% increase in the cost of credit.

• “The Committee is of the considered opinion that discontinuation of the practice of issuance of LoU/LoC for trade credit by the RBI was a knee-jerk reaction,” the report said. “The Committee feels that the RBI got unnerved with the PNB fraud and it hastened the decision to ban LoU/LoC without much thought and consideration.”

• The panel noted that all the stakeholders, including banks, were of the opinion that LoUs and LoCs were accepted globally and their efficacy as a source of cost-effective short-term credit of foreign currency for importers was ‘unmatched’.

• This will affect the cost competitiveness of the country’s trade and industry and have a cascading effect on jobs. The loss of jobs is something the country can ill-afford.

• The committee said that RBI should have engaged in more consultations with stakeholders on the matter before resorting to discontinuation of LoUs and LoCs.

• The Committee also highlighted the fact that the discontinuation of LoCs and LoCs as a response to the fraud has set off a knock-on effect of conservatism in the banking sector.