The Hindu Business Line : Prudential norms for letters of comfort

The RBI directive
Every LoC should be approved by the bank board.
Banks must make provision for keeping a record of all the LoCs issued.
Banks should make an assessment of the likely financial impact of the LoCs.

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Mumbai, March 4 Indian banks that have been issuing Letters of Comfort (LoCs) to help their overseas subsidiaries or branches meet their financial requirements, should now follow certain prudential norms.

The Reserve Bank of India, in a notification issued today, laid down certain norms for banks to follow while issuing LoCs.

As per these norms, every LoC should be approved by the bank board. The bank should have a well-defined policy for the issuance of LoCs, which will state the indicative cumulative ceilings up to which LoCs could be issued.

Banks must also make provision for keeping a record of all the LoCs issued.

The bank should make an assessment of the likely financial impact of the LoCs and outstanding, in case it is called upon to support its subsidiary in India or abroad.

As a first-time exercise, such an assessment should be undertaken in respect of all the outstanding LoCs issued and outstanding as on March 31, 2008 and the results placed before the board at the ensuing meeting. Such an assessment should form a part of the bank’s liquidity planning exercise as well, the RBI said.

Any LoC that is assessed to be a contingent liability of the bank by a rating agency or internal or external auditors, shall be treated, for all prudential regulatory purposes, on the same footing as a financial guarantee issued by the bank.

The banks should disclose full particulars of all the LoCs issued by them during the year, including their assessed financial impact, as also their assessed cumulative financial obligations under the LoCs issued by them in the past and outstanding, in its published financial statements, as part of the ‘Notes to Accounts”, the RBI said.

According to a senior bank official a LoC is similar to a Letter of Credit that is issued to exporters or borrowers domestically. It facilitates transactions abroad. “Though it is not a guarantee, it acts as a guarantee because it is between banks,” he said.

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