RBI bans issuance of LoUs

The aftermath of PNB scam has created various shifts in banking system and regulators have tightened the grip on banks across the board. In a new resolution shared by RBI, it has banned banks for issuance of LoU (Letter of Undertaking) for availing buyers credit.

The benefit of LoUs is mainly for small and medium enterprises who avail such credit for daily business purpose. The gems and jewellery industry will be worst hit by this move. LoUs have long been main source of funding for the industry to avail buyers credit.

Further, this will also be a discouragement for some small and medium enterprises as banks find it difficult to lend SMEs due to higher delinquency. These include small auto components maker and also some from textile industry who also avail LoU as funding source.

However, the industry body suggests that LoUs account for 4 per cent of the total trade finance which indicates a lower impact on imports. However, banks have sought clarification from RBI for alternative sources of finance to importers and repayment facilities to be provided to borrowers. This might impact the non-interest income of banks till the time RBI removes the ban