Banning LoU/ LoC after PNB scam is like throwing baby with the bath water: Parliamentary Panel

New Delhi, Aug 7 (KNN) Raising concern that ban of LoUs in the country has resulted into increase of cost by 2 to 2.5 per cent for MSMEs, a parliamentary panel has urged the Reserve Bank of India for immediately restarting issuance of Letters of Undertaking (LoUs) and Letters of Credit (LoCs) with proper safeguards to increase availability of credit for traders.

RBI has banned issuance of LoUs in March this year after their misuse was detected in the Rs 14,000 crore Punjab National Bank (PNB) scam.

Terming the ban by RBI a ‘knee jerk’ reaction to the PNB fraud, the parliamentary standing committee on commerce said scrapping of LoU/LoC, used extensively for trade finance, has resulted in rise in the cost of credit between 2 per cent and 2.5 per cent, especially for small and medium enterprises (SMEs) and loss of jobs.

The House Panel said the RBI should have engaged more in consultations with stakeholders on the matter before resorting to discontinuation of these instruments.

“It is of the considered opinion that LoU/LoC should be restored at the earliest albeit with proper safeguards. Its restoration assumes more significance in the face of the fact that the content of imports is over 20 per cent of India’s total exports,” it said in its report — Impact of banking misappropriation on trade and industry.

“It is a typical case of throwing baby with the bath water and it must be stopped,” the committee said.

The parliamentary panel, headed by Naresh Gujral, member of the Rajya Sabha, emphasized on streamlining and simplifying the processing of the letters of credit issued by the banks.

The report pointed that none of the stakeholders or banks said that the practice of issuing LoU/-LoC was flawed.

The committee said in present times when the currency is witnessing high depreciation, it is imperative that the cost of credit for imports must be minimal.

“The ban on LoU/LoC takes away the benefit of cheap source of funds availed by the importers. Costly imports shall lead to higher costs of production and erode the competitiveness of the domestically produced goods,” it said.

“The caution has inadvertently made banks becoming inaccessible to the MSME sector. Such an approach has the dangers of making banking services elitist and subservient to a few large corporates leaving out the vast majority of MSME units, which are not able to measure to the standards and parameters laid down by external credit rating agencies for getting AAA or AA ratings,” it said