The Reserve Bank of India’s (RBI’s) move to ban the issuance of letters of undertaking (LoUs) for availing of buyers credit is being seen as closing the tap. But it is nothing but a filter. In all fairness, there is indeed a drying up of dollars as importers who have been funneling money into their operations through this route have been hit hard. An LoU guaranteed cheap money and in many genuine small enterprises, it provided an easy means to conduct business. Now, the option to roll over existing LoUs or letters of comfort (LoCs) is no longer available. Hence the demand for dollars has shot up. The Federation of Indian Export Organisations, the apex body of the country’s export promotion organizations, estimates about 4% of financing would be hinging on LoUs. Therefore, at the aggregate level, the impact on imports would be minimal. RBI’s move to do away with this modus operandi should be seen as a step towards aligning with globally accepted standards.

(Live Mint)