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On Tuesday, 13 March 2018, Reserve Bank of India ordered commercial banks in the country to suspend all issuance of Letters of Undertaking (LoUs) and Letter of Comfort (LoCs) for trade credits for import to India with immediate effect. The decision comes as these instruments were misused in perpetuating the biggest fraud in recent Indian banking history.

Letters of Undertaking (LoUs) and Letter of Comfort (LoCs) are bank guarantees under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank. These financial instruments are mostly used between Indian banks, according to Reuters. 

Importers of petrochemicals have yet to see any impact on the business as Letters of Credit are still allowed, which have more international acceptability. It just involves more paperwork and the due diligence is more stringent.