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Tuesday, June 28, 2022

RBI should reintroduce LoUs with safeguards: India Inc

The LoU ban has affected the industry, leading to a rise in the cost of credit, said Piruz Khambatta, President of Confederation of Indian Industry (CII), Western Region.

By: ENS Economic Bureau | Mumbai |
Updated: April 7, 2018 12:56:50 am
RBI should reintroduce LoUs with safeguards: India Inc The RBI banned LoUs as Nirav Modi and Mehul Choksi misused LoUs to divert bank funds.

India Inc wants letter of undertaking (LoU), which was banned by the Reserve Bank of India (RBI) in the wake of the Rs 13,000-crore Punjab National Bank (PNB) fraud, back.

The LoU ban has affected the industry, leading to a rise in the cost of credit, said Piruz Khambatta, President of Confederation of Indian Industry (CII), Western Region. “The RBI should reintroduce LoUs with proper safeguards as genuine importers are suffering,” he said in an interview with The Indian Express.

“It’s like one exporter exporting bad quality mangoes and the government banning the entire mango exports. You cannot do that. You should put safeguards in place. Unfortunately they have stopped it. The result would be that cost of credit would go up, especially for small units. Small units are already under pressure due to GST refund and this is like a double whammy,” he said.

The reintroduction of LoUs and Letter of Comfort would help manufacturers in undertaking cost-effective production for both domestic and export markets, Khambatta said. The RBI banned LoUs as Nirav Modi and Mehul Choksi misused LoUs to divert bank funds.

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On corporates defaulting loan repayments and some promoters fleeing the country, he said, “There’re genuine defaults also. When a corporate is not doing well, there’s a default. The problem was that we didn’t have a bankruptcy code in the past. We didn’t have a fast way to resolve stressed assets. Now brankrupcy code is in place. In the US, big corporates had gone bankrupt and they had bounced back. There should be quicker resolution of stressed assets.”

“We need to identify the black sheep. These black sheep are the ones that the government should be going after… not 99 per cent of the good people. Why interest rates are high in India? Because of this (defaults). Even we businessmen should support the prosecution of black sheep. Those are the people who cicumvented the law and defaulted. I don’t think any accountable industry association can support or subscribe to unethical practices,” Khambatta said.

Regarding the banking woes, he said the country wants major banking reforms. “We expect the government to bring those reforms. Some of the banks need reconstruction. Small and medium units and exporters should get lot of easy credit as these are the growth engines of the country,” he said.

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