NEW DELHI: The Parliamentary Standing Committee on Commerce on Monday recommended that the Reserve Bank revoke the ban on letters of comfort (LoC) and letters of undertaking (LoU) at the earliest.
The report from the panel went on to note that the RBI’s ban was a “typical case of throwing the baby along with the bathwater”.
The central bank had, in March this year, banned banks from issuing LoCs and LoUs after the Rs 14,000 crore Punjab National Bank scam came to light.
These instruments, extensively used by exporters and international traders to get foreign exchange credit, had been the primary avenue through which the scam had been perpetrated.
However, the panel noted that the RBI’s move was a knee-jerk reaction. “The committee strongly feels the RBI has perhaps not held enough consultations before deciding,” adding that the RBI should have “done more scrutiny” and that “the discontinuation of issuance of LoUs and LoCs (was) a knee-jerk reaction by the RBI to the recent frauds”.
The committee also noted that in its response to the Department of Financial Services on the bank’s impact on credit cost for short-term foreign currency loans, the central bank had admitted to possessing no comparative data.
“If this is the case, the Committee is constrained to say that the RBI should have done more scrutiny,” the panel’s report said.
The discontinuation of the two trade finance instruments have reportedly resulted in significant escalation in the cost of credit for those who need foreign credit for overseas purchases -- especially importers and exporters in the gems and jewellery sector.
Ratings agency India Ratings had also noted in a report in April, that the ban would increase finance costs for projects where a substantial portion of plant and machinery is required to be imported.
“The committee therefore recommends that LoU/LoC should be restored at the earliest, albeit with proper safeguards,” the panel submitted. Meanwhile, the panel has also recommended that maximum concessions be offered to MSME on charges for letters of credit.