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Ban On Letters Of Undertaking: Bulk gold, diamond importers to be hit

Ban On Letters Of Undertaking: Bulk gold, diamond importers to be hit

March 14, 2018


The Reserve Bank of India's decision to ban letters of undertaking (LoU) for trade finance in the wake of the Punjab National BankBSE -4.18 % fraud is likely to have only a limited impact on majority of the imports barring the bulk importers of gold and diamonds, experts said. Most of the trade finance is down through bank guarantees and letters of credit, which require adequate surety or collateral.LoUs account for only 4-5% of the total finance, industry experts said.“The impact of this move is limited because alternative instruments like bank guarantees and letter of credit are available. Usually large players, mostly in the gems and jewellery sector use them.” said Ajay Sahai, director general, Federation of Indian Export Organisations.


An official from the Gems and Jewellery Export Promotion Council said that normally, trade works on letter of credit or bank guarantee wherein the trader has to give adequate surety or collateral. “However, banks usually give letters of undertaking discreetly,” he said.The Reserve Bank of India in a notification on Tuesday decided to “discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category–I banks with immediate effect”.The move came on the back of Punjab National Bank reporting fraudulent issuance of LoUs transactions in accounts amounting to almost Rs 12,967.86 crore, to the RBI through its fraud monitoring reporting system.


Praveenshankar Pandya, former chairman of the council said that the government is tightening the noose around the general industry most of which are SMEs with limited and difficult access to finance. “There will not be much of an impact because the industry at large was taken aback when it got to know about the scale of LoUs being used by one company,” he said.Industry expects banks to become more cautious and likely to ask for more surety from importers.



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