The Reserve Bank of India’s decision to stop issuing Letters of Undertaking and Letters of Credit for trade credit was a “knee-jerk reaction”, the Parliamentary Standing Committee on Commerce has said. The panel has reportedly asked the central bank to reintroduce the guarantee options at the earliest after putting safeguards in place, reports said, quoting from a document tabled in the Rajya Sabha on Monday.
Restoring letters of credit will help increase the availability of credit to traders, while not doing so would impact cost competitiveness in trade and industry and the employment rate, it added.
In March, the central bank suspended the issuance of the documents, about a month after India’s biggest bank fraud was discovered. Authorities found that letters of undertaking were issued fraudulently by employees at Punjab National Bank. An LoU is a letter of credit, where one bank tells another that it will meet a customer’s liability.
“The committee feels that the RBI got unnerved with the PNB fraud and it hastened the decision to ban LoU/LoC without much thought and consideration,” The Hindu quoted from the report titled “Impact of banking Misappropriation on Trade and Industry”. The panel noted that stakeholders cited that the documents are accepted globally and are regarded as an efficient and unmatched short-term credit of foreign currency option for importers.
The parliamentary committee said the curbs on the financial instruments had led to a rise in the cost of credit by 2% to 2.5%.