The Reserve Bank of India has banned the use of letters of undertaking (LoUs) and letters of comfort (LoCs). The action has been prompted by the Rs 12,700-crore fraud at Punjab National Bank. Banking experts feel this move may have an impact on the cost of imports as well as making Indian banks lose the advantage in financing imports. However, it is bound to increase the responsibility of banks that are lending based on these instruments. RBI said the directive takes immediate effect, but it clarified that letters of credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with existing regulations.
