Post Punjab National Bank (PNB) Fraud the Reserve Bank of India (RBI) has banned the use of letters of undertaking (LoUs) and letters of comfort (LoCs). RBI has issued the fresh directives on issuance of LoUs and LoCs for Banks in India. Banning of instruments may raise the cost of imports by up to half a percentage point.
These two instruments are issued by Indian banks to domestic importers to get foreign exchange from banks abroad at a cheaper rate.
LoUs and LoCs were misused by diamond merchants Nirav Modi and Mehul Choksi which lad to 12,700 Crore PNB Scam.
An LoU or Letter of Undertaking is a type of guarantee between two banks that allows the issuer bank’s customer to get foreign exchange from another Indian bank’s foreign branch in the form of short-term credit.
Banning of LoU’s and LoC’s will help global banks on pricing as earlier out priced by Indian banks.This may impact imports.