Clampdown on LoUs

Letters of Undertaking, or LoUs, have come under the scanner after Nirav Modi fraudulently obtained such credit guarantees from state-run Punjab National Bank to avail overseas loans.

What is it? LoU is a guarantee issued by Indian banks against which a foreign currency loan is availed

Who are they issued to? LoU is used by a bank’s customer to avail short-term credit in a foreign country and used by businesses to import goods

How does it work? The borrower approaches a bank’s forex department in India and the bank seeks collateral, after which the LoU is issued to obtain foreign currency loans from an overseas bank

Post the ban on issuance of LoU/LoCs by RBI for trade credit, companies have the option of using bank guarantees to raise buyers’ credit, based on a sanctioned limit