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