The Reserve Bank of India’s decision to discontinue the issuance of Letters of Undertaking (LoU) and Letters of Credit (LoC) for trade credit was a “knee-jerk reaction” to the Punjab National Bank fraud case and the facility should be restored at the earliest, the Parliamentary Standing Committee on Commerce said in a report tabled in the Rajya Sabha on Monday.
The Committee also noted that all the stakeholders it consulted, representing trade and industry, unanimously said that the discontinuation of the LoU and LoC facility had resulted in a 2-2.5% increase in the cost of credit. “The Committee is of the considered opinion that discontinuation of the practice of issuance of LoU/LoC for trade credit by the RBI was a knee-jerk reaction,” the report said. “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 panel noted that all the stakeholders, including banks, were of the opinion that LoUs and LoCs were accepted globally and their efficacy as a source of cost-effective short term credit of foreign currency for importers was “unmatched”. “The Committee notes that there is also unanimity that the ban of LoU/LoC has resulted in rise in the cost of credit by 2% to 2.5%,” the report added.
“This will affect the cost competiveness of the country’s trade and industry and have a cascading effect on jobs. The loss of jobs is something the country can ill-afford.”
The Committee said that RBI should have engaged in more consultations with stakeholders on the matter before resorting to discontinuation of LoUs and LoCs.
“It [the Committee] is of the considered opinion that LoU/LoC should be restored at the earliest albeit with proper safeguards,” the report said. “Its restoration assumes more significance in the face of the fact that the content of imports is over 20% of India’s total exports.”
The Committee also highlighted the fact that the discontinuation of LoUs and LoCs as a response to the fraud has set off a knock-on effect of conservatism in the banking sector.
MSME sector hit
“The banks have become very stringent in their operation and credit exposures,” the report said.
“The caution has inadvertently made banks becoming inaccessible to the MSME sector. The Committee is concerned that such an approach has the dangers of making banking services elitist and subservient to a few large corporates leaving out the vast majority of MSME units,” the report added.