Ban on LoUs by RBI will have disruptive impact, raise cost of credit: CII

Posted by Daily Shipping Times on 16-03-2018        Tweet

NEW DELHI: Industry bodies recently said RBI's decision to ban Letters of Undertaking (LOUs) for trade credit for imports will have a disruptive impact, at least in the immediate term, as small businesses would require higher working capital.

In a significant development, the RBI  barred banks from issuing guarantees in the form of LoUs and letters of comfort.

Ajay Sahai, Director General of exporters' body FIEO opined that RBI's move will have limited impact as LoUs are generally used in gems and jewellery sector and that too by large players.

In a statement, CII President Shobana Kamineni said the move would have a "disruptive impact" on the buyers' credit market, in the immediate term.

"The traders who have been conducting business through these two instruments will now have to necessarily shift their transactions to Letters of Credit and bank guarantees," said Kamineni.

PHD Chamber President Anil Khaitan said banning of these instruments is not a solution to curb malpractices. "We know that this move by RBI would result into increasing working capital requirement of industries as per their trade cycle and will disrupt trade, services and industry," said Khaitan.