RBI ban on LoUs will disrupt operations, raise costs: India Inc

NEW DELHI: Was the Reserve Bank’s decision to ban letters of undertaking (LoUs) an extreme step taken in haste? While the central bank may have done it to avoid financial frauds in future, industry bodies say banning LoUs alone will not help curb malpractices.

“The decision of RBI to discontinue Letters of Understanding and Letters of Comfort for trade credit would have a disruptive impact on the buyers’ credit market, in the immediate term,” said Shobana Kamineni, president, Confederation of Indian Industry (CII).

She said traders who have been conducting business through these two instruments will now have to necessarily shift their transactions to Letters of Credit and bank guarantees, which will increase cost burden on businesses. “The result would be that cost of credit may go up, especially for the SMEs”, she added.

India Inc feels instead of outrightly banning, RBI could have strengthened and tightened the existing regulations on LoUs and LoCs. Else, these could have been phased out so that routine business operations are not disrupted.

Anil Khaitan, president of PHD Chamber of Commerce, said, “Industry, particularly MSMEs whose working capital is based as per their trade cycle, will require higher working capital or else suffer irreparable losses.”

However, exporters’ body FIEO chose to play down the impact. “This may slightly increase the cost as such instruments are costlier by 0.5-1 per cent,” said Ajay Sahai, director-general, Federation of Indian Export Organisations.

PATEL BREAKS SILENCE

• A day after banning LoUs, RBI governor Urjit Patel defended the regulator’s role, saying it’s difficult for it to be present everywhere to contain such instances

• Meanwhile, hinting the government may be unhappy with RBI decision to ban LoUs, Finance Ministry’s Principal Economic Advisor Sanjeev Sanyal said no issue can be dealt in silos and policymakers have to be careful that blocking of one route does not spread to rest of the system.