Indian exporters urge RBI to reconsider ban on LoUs

29 Mar '18

2 min read

Concerned over the recently-unearthed $2-billion fraud at the Punjab National Bank, the Federation of Indian Export Organisations (FIEO) has urged the Reserve Bank of India (RBI) to reconsider banning letters of undertaking (LoUs) as it is causing distress to players in sectors such as textiles and leather, apart from raising their operating costs.

FIEO, an umbrella body representing a number of export organisations, has written to the RBI requesting it to consider introducing LoUs with safeguards as alternative instruments were increasing the operating cost of exporters by up to 3 per cent, according to a report in a top Indian business daily.

With a few banks cancelling issued LoUs, the situation has turned worse as exporters do not have enough cash to pay upfront for their imports, FIEO director general Ajay Sahai was quoted as saying.

An LoU is a guarantee given by one bank to another to repay a loan on behalf of a client and which allows the client to raise short-term credit to mainly pay for an import.

FIEO also wrote that existing LoUs or LoCs (letters of comfort) should be allowed to live their normal validity as some banks have asked exporters to deposit equivalent amount in lieu of the instruments. (DS)

Fibre2Fashion News Desk – India

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