Finance Ministry asks RBI to help ease industry troubles post LoU ban

The Finance Ministry has asked the RBI to look into the problems being faced by industry and banks following the ban on LoUs, sources said.

Following the Nirav Modi fraud case, the Reserve Bank of India recently banned issuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoC), used extensively for trade finance.

Nirav Modi and associates along with some Punjab National Bank officials used LoUs to defraud the lender of over Rs.13,000 crore.

The sources said the Finance Ministry received representations from various corporates and banks against the abrupt banning of LoUs, asking the RBI to provide some breathing space to them.

The ministry has forwarded those representations to the central bank to take a final call, the sources said.

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According to the representations, the sudden discontinuation of LoUs has affected small and medium enterprises. So, on their behalf, the ministry has requested RBI to look into the matter, the sources added.

The cost for trade finance has also gone up because of shift to letters of credit, as per the representations. These instruments involve a commission fee along with a so-called acceptance charge which is not the case with LoUs as they only involve a guarantee fee.

Earlier in March, RBI barred banks from issuing guarantees in the form of LoUs as it clamped down on the import financing route used by fugitive jeweller Nirav Modi and his uncle Mehul Choksi for allegedly committing India’s biggest bank fraud.

RBI also banned with immediate effect issuance of LoCs which, like LoUs, are used by importers to fund their overseas purchases. However, letters of credit and bank guarantees will continue upon meeting certain conditions.

(With inputs from PTI)