As RBI bans LoUs for trade credit for imports, mixed reaction in industry over impact

New Delhi, Mar 15 (KNN) With the Reserve Bank banning letters of undertaking (loss) post Nirav Modi scam, the industry bodies have raised concern over the impact of the decision on the sector especially the Micro, Small and Medium Enterprises (MSMEs).

The Reserve Bank of India (RBI)  decided to discontinue issuance of Letters of Undertaking (LoU) and Letters of Comfort (LoC) for trade credit for imports into India. Authorised dealer-1 (AD-1) category banks will not be allowed to issue LoCs and LoUs for this line of business, the regulator said in a notification on its website.

Responding to the decision, PHD Chamber of Commerce and Industry President Anil Khaitan said that banning of the LoUs will not help curb malpractices or scandals.

He further said that the industry especially the micro, small and medium enterprises (MSMEs) have working capital based as per the trade cycle, which will now require higher working capital or else will have to incur losses.

On the other hand, Ajay Sahai, Director General of Federation of Indian Export Organisations said that the move is not to have any large impact.

He informed that the LoUs are generally used in the gems and jewellery sector and mostly used by the large players.

The RBI move comes after the Nirav Modi scam came to light in which the business man’s associates approached the domestic branch of Punjab National Bank to issue fraudulent LoUs to foreign branches of other Indian banks through the SWIFT network. These LoUs were not registered in the core banking system for PNB. (With Inputs from a Media report) (KNN/DA)