Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) discontinued by RBI for Trade Credits
Reviewing the guidelines after PNB fraud of Rs.1200+ crores, RBI vide notification dated 13 March 2018 discontinued issuance of LOU/ LOC for Trade Credits for import with immediate effect.
That means, the importers will note be able to take buyers credit anymore, which was extended by the foreign lender (including foreign branches of Indian Banks) on the strength of LOU issued by a Bank in India. Importers were using buyers credit route for relatively cheaper source of credit.
“On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect. Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.” reads the RBI notification
The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999.