Money & Banking

Exporters urge RBI to reconsider the ban on LoUs

Amiti Sen New Delhi | Updated on March 21, 2018 Published on March 21, 2018

Want existing LoUs to stay valid, and fresh ones to be allowed with safeguards

Exporters have urged the Reserve Bank of India to reconsider the ban on letters of undertaking (LoUs), which was triggered by the $2 billion fraud at the Punjab National Bank, as it was causing distress to players in sectors such as textiles and leather and increasing their operating costs.

“With some banks deciding to cancel LoUs that have already been issued, the situation has become worse as exporters do not have enough cash to pay upfront for their imports,” said Ajay Sahai, Director-General, FIEO.

An LoU is a guarantee given by one bank to another to repay a loan on behalf of a client and which allows the client to raise short-term credit to mainly pay for an import.

FIEO, an umbrella body representing a number of export organisations, has written to the RBI requesting its intervention in extending help to exporters hit by the move to ban LoUs.

In the letter, FIEO has asked the RBI to consider introducing LoUs with safeguards as alternative instruments were increasing the operating cost of exporters by up to 3 per cent.

It also stressed that existing LoUs or LoCs (letters of comfort) should be allowed to live their normal validity as some banks have asked exporters to deposit equivalent amount in lieu of the instruments.

“Although the RBI banned issuing of fresh LoUs, some banks have gone an extra mile and have cancelled LoUs already issued. Where LoUs have validity till, let us say September 2018, banks have cancelled them and asked the exporter to deposit the money in cash.

“This has created a huge problem as the exporter would be expecting to make the payment only in September and it is not possible for him to make an upfront payment at once,” Sahai said.

While a handful of sectors using LoUs such as textiles, leather, and gems and jewellery have been considerably hit by the ban, a majority of small exporters have not been affected by the RBI’s decision as they mostly use Letter of Credit and bank guarantee for their business.

Published on March 21, 2018
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