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Credit cost to rise as LoUs issuance discontinued: SBI Ecowrap
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SME Times News Bureau | 16 Mar, 2018
The RBI's decision to
discontinue the Letters of Undertaking (LoUs) or Letters of Comfort
(LoC) might increase the credit cost for imports as it will lead to a
shift towards "other off-balance sheet" products, said a State Bank of
India (SBI) report on Friday.
According to SBI Ecowrap report,
the shift to "other off-balance sheet" products will be
"administratively time consuming" and in the short-term might impact
export funding as well.
On March 13, RBI decided to discontinue
the system in the wake of the Rs 12,600 crore fraud at the state-run
Punjab National Bank (PNB).
"Banning LoUs/LoCs might lead to
shifting to other off balance sheet products -- LCs, Bank Guarantees,
other fund based facilities or on to balance sheet," the SBI Ecowrap
report said.
"We, however, believe the shift to other off balance
sheet products if occurs, will be administratively time consuming.
However capital charge may vary for different products leading to
changes in capital requirements in either direction depending on the
product used and associated risk."
Earlier, banks were permitted
to issue guarantee/LoU/LoC in favour of overseas supplier, bank or
financial institution up to $20 million per import transaction under the
automatic route for a maximum period up to one year in case of import
of non-capital goods.
As per the latest available RBI data,
guarantees given on behalf of constituents outside India stood at Rs
1.95 lakh crore as on March 31, 2017.
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