Discontinuance of Letters of Undertaking (LOUs) and Letters of Comfort (LOCs) for Trade Credits for imports
March 16, 2018
Members of the Council
Sub : Discontinuance of Letters of Undertaking (LOUs) and Letters of Comfort (LOCs) for Trade Credits for imports
As members are aware Master Direction No. 5 dated January 1, 2016 of Reserve Bank of India (RBI) stated the following with regard to Guarantee for Trade Credit for import into India.
Extract of RBI Master Circular No. 5 dated January 1, 2016
Guarantee for Trade Credit: AD Category I banks are permitted to issue guarantee/ Letters of Undertaking (LOU)/Letters of Comfort (LOC) in favour of overseas supplier, bank or financial institution up to USD 20 million per import transaction for a maximum period up to one year in case of import of non-capital goods (except gold, palladium, platinum, rhodium, silver, etc). For import of capital goods, the period of guarantee/ Letters of Credit/ Letters of Undertaking by AD can be for a maximum period up to three years. The period is reckoned from the date of shipment and the guarantee period should be co-terminus with the period of credit. Further, issuance of guarantees will be subject to prudential guidelines issued by the RBI from time to time.
The RBI has now issued a Circular No. 20 dated 13th March 2018 (copy enclosed) stating the following.
- On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect.
- Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 (copy enclosed) on “Guarantees and Co-acceptances”, as amended from time to time.
Members may kindly note the above
Thanks and regards
R. Ramesh Kumar