Parliamentary panel suggests restoring banned LoUs

New Delhi : A Parliamentary panel on Monday said the banning of Letter of Understanding (LoU)/Letter of Comfort (LoC) post Punjab National Bank (PNB) scam was a "knee-jerk reaction by the RBI" and needs to be restored at the earliest.

"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 on Monday.

"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 noted.

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 produced goods.

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.

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 sector.

It further suggested necessary interventions to streamline and simplify the procedure in processing of Letters of Credit (LCs).