The discontinuation of Letter of Undertaking (LoU) and Letter of Comfort (LoC) by the RBI, following the banking
fraud episode by high-profile jeweller Nirav Modi, will not have much impact on trade as such instruments are being used by just about 5 per cent of importers, according to exporters’ body FIEO.
Mostly large players in the gems and jewellery and metal and petroleum sectors were using the two instruments, it added.
“Since most exporters are using Letter of Credit and Bank Guarantees, which are relatively safe, the move will not have much adverse bearing on exports. However, this may slightly increase the cost as such instruments are costlier by about 0.5-1 per cent,” FIEO President Ganesh Kumar Gupta said in an official release.
He said none of the instruments were 100 per cent safe and therefore, one should carefully evaluate its pros and cons before discontinuing LoU and LoC.
FIEO is of the opinion that banks should not tighten the liquidity to the gems and jewellery sector as it is coming back on track due to good order booking from the US, Europe, China, Japan as well as rising demand within the country. “The sector is extremely important as it provides exports worth about $43 billion and gives employment to over 5 million artisans and workers,” the release said.
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