Small and medium enterprises face brunt of LoU ban

Post PNB scam, the banking sector has witnessed many consequences impacting the credit flow in the Indian economy. The ministry of Finance received many representations on easing the grip on banks and providing alternatives to LoUs.The PNB scam of Rs. 13,000 crore has forced RBI to tighten the grip on PSU banks and directed to identify similar instances. Further, the banks were also directed not to issue LoU’s and guarantees.

 The LoUs and LoCs are largely used as major facility to trade finance by the small and medium enterprises. The shift to Letter of Credit has suddenly increased the cost of borrowings for the enterprises as the instruments involve commissions fee and acceptance charges, which was not the case with LoUs as they include only guarantee fee.

 Indian banking system has witnessed frauds worth Rs.18,170 crore in FY17 with 12,533 number of frauds recorded in the banking system. This further throws further light to the chaotic situation in the system. Till the time RBI evaluates the situation, the small and medium enterprises will feel the brunt of the chaotic situation in the banking system