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Parliamentary panel asks RBI to restore letters of undertaking at the earliest

According to the committee, the RBI should have engaged more in consultations with stakeholders on the matter before resorting to discontinuation of LoU/LoCs [letters of comfort].

twitter-logo BusinessToday.In   New Delhi     Last Updated: August 8, 2018  | 10:05 IST
Parliamentary panel asks RBI to restore letters of undertaking at the earliest

In mid-March this year, as the Rs 14,000-crore fraud at Punjab National Bank was steadily unravelling, then Finance Minister Arun Jaitley had disclosed in Parliament that 1,213 fraudulent letters of undertaking (LoUs) had been issued to Nirav Modi's companies between March 2011 and May 2017. That was the modus operandi of the fraud perpetuated by the diamantaire-turned-fugitive and his uncle, Mehul Choksi.

In response, the RBI had banned the instrument with immediate effect, but now finds itself hauled up by a parliamentary panel for its "kneejerk reaction".

The Parliamentary Standing Committee on Commerce yesterday asked the apex bank to restore LoUs at the earliest with "proper safeguards" so as to increase the availability of credit for traders. "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," read a report tabled in the Rajya Sabha, titled Impact of Banking Misappropriation on Trade and Industry.

According to the committee, the RBI should have engaged more in consultations with stakeholders on the matter before resorting to discontinuation of LoU/LoCs [letters of comfort].

The report further claimed that the ban resulted in a jump in the cost of credit by 2-2.5 per cent. Previously, these instruments were largely issued by domestic branches of Indian banks for customers to avail trade credit from foreign branches of other Indian banks and, thus, ease the high cost of imports.

The panel pointed out that the increased cost of financing would only hurt the cost-competitiveness of country's trade and industry, and have a cascading effect on jobs. And the loss of jobs is something the country can ill-afford.

"It is of the considered opinion that LoU/LoC should be restored at the earliest albeit with proper safeguards. Its restoration assumes more significance in the face of the fact that the content of imports is over 20 per cent of India's total exports," said the report. "The ban on LoU/LoC takes away the benefit of cheap source of funds availed by the importers. Costly imports shall lead to higher costs of production and erode the competitiveness of the domestically produced goods."

The committee also pointed out that at a time when the rupee is witnessing high depreciation, it is imperative that the cost of credit for imports be minimal.

Significantly, the report stated that the discontinuation of LoU/LoC as a response to the fraud and misappropriation not only hurt importers, but also set in a contagion of conservatism in banking sector. "The caution has inadvertently made banks becoming inaccessible to MSME [Micro, Small & Medium Enterprises] sector," it said, adding, "The Committee is concerned that such an approach has the dangers of making banking services elitist and subservient to a few large corporates leaving out the vast majority of MSME units which are not able to measure to the standards and parameters laid down by external credit rating agencies for getting AAA or AA ratings."

This development is sure to bring cheer to the Federation of Indian Export Organisations (FIEO). The apex exporters lobby had written to the RBI and finance ministry in April, asking the authorities to lift the blanket ban on LoUs/LoCs. At the time, FIEO director general Ajay Sahay had said that the gems & jewellery exports - which used to rely heavily on these instruments - had contracted by a massive 36 per cent following the ban. It was the small traders in particular, who were left paying the price for a billionaire scamster's greed.

Edited by Sushmita Choudhury Agarwal

With PTI inputs

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