Panel favours return of LoUs

New Delhi: A parliamentary panel has suggested the RBI should restore letters of undertaking/comfort, banned by the central bank after the Punjab National Bank-scam.

"Issuance of LoUs/LoCs should be restored with proper safeguards," said a report by the parliamentary committee on commerce headed by Rajya Sabha member Naresh Gujral of the Shiromani Akali Dal.

Necessary steps should also be taken to simplify and streamline the processing of letters of credit, which were not banned, the report presented in Parliament on Monday said.

Importers use these guarantees to borrow overseas. The central bank had banned LoUs/LoCs after PNB informed the exchanges in February that jewellers Nirav Modi and Mehul Choksi had allegedly secured fraudulent LoUs in connivance with some of the employees at a Mumbai branch of the bank.

"Discontinuation of the practice of issuance of LoU/LoC for trade credit by the RBI was a knee-jerk reaction. 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," it said.

The panel added that none of the stakeholders from industry and banks suggested the LoU/LoC was a flawed document.

After the ban, most banks reduced their exposures to these instruments by over 75 per cent, the report said.

Export credit, too, declined 24.4 per cent in 2017-18 and was down 29.6 per cent year-on-year in 2018, the committee said. This slide, along with discontinuance of LoU/LoCs, will impact exports adversely, the panel said, adding that the issue "deserves immediate attention in order to avert likely disruption to trade and industry".

Different views

However, exporters' body Fieo had earlier said the discontinuation of LoU/LoC by the RBI would not have much impact on trade as such instruments were used by just about 5 per cent of importers.

Mostly large players in the gems and jewellery and metal and petroleum sectors were using the two instruments, it added.

"Since most exporters are using letters of credit and bank guarantees, which are relatively safe, the move will not have much adverse bearing on exports. However, this may slightly increase the cost as such instruments are costlier by about 0.5-1 per cent," Fieo president Ganesh Kumar Gupta had said.

The panel noted banks were also asking for higher collateral, which would adversely impact the competitiveness of the sectors.

The panel said: "The RBI has itself promoted it after thorough verification more than a decade ago. There is also a unanimity that the ban of LoU/LoC had resulted in a rise in the cost of credit by two to two-and-a-half per cent.

"This will certainly affect the cost competitiveness of the country's trade and industry and have a cascading effect on jobs. The loss of jobs is something the country can ill-afford."

The committee observed the RBI should have engaged more in consultations with stakeholders on the matter before discontinuing the instruments and suggested restoring it at the earliest with proper safeguards.