SME Times News Bureau | 07 Aug, 2018
Terming the banning of Letter of Understanding (LoU)/Letter of Comfort (LoC) post Punjab National Bank (PNB) scam a "knee-jerk reaction by the RBI", a Parliamentary panel on Monday said the advesely impacted exports and the MSME sector.
After the ban, e Export credit too
declined 24.4 percent in the 2017-18 financial year and was down 29.6 percent
year-on-year in 2018, the panel said, adding that discontinuance of LoU/LoCs
will impact exports adversely.
The panel also highlighted that the discontinuation of
LoU/LoC as a response to the fraud and misappropriation has set in a contagion
of conservatism in the banking sector and made banks inaccessible to the MSME
"Discontinuation of the practice of issuance of LoU/LoC for trade credit
by the RBI was a knee-jerk reaction," the Parliamentary Standing Committee
on Commerce said in its report presented in Parliament.
"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," the report said.
"It is a typical case of throwing baby along with the bath water and it
must be stopped. The Committee, therefore, recommends that LoU/LoC should be
restored at the earliest albeit with proper safeguards," it stated.
The panel, headed by Rajya Sabha member Naresh Gujral, said there is a
unanimity that the ban of LoU/LoC has resulted in rise in the cost of credit by
2 to 2.5 per cent and it will impact the competitiveness of the domestically
It said the ban will affect the cost competitiveness of country's trade and
industry and will have a cascading effect on jobs. The loss of jobs is
something the country can ill-afford, the committee's report said.
It further suggested necessary interventions to streamline and simplify the
procedure in processing of Letters of Credit (LCs).