A parliamentary committee has said the Reserve Bank of India (RBI) should rescind its decision to discontinue the issuance of letters of credit (L/Cs) and letters of undertaking (LoUs) for trade credit.

The Parliamentary Standing Committee on Commerce (PSCC) said in a report tabled to India's Rajya Sabha upper house of parliament that the RBI's move was an overreaction to the US$2 billion Punjab National Bank (PNB) fraud case and the two financial instruments should be made available again within days.

Knee-jerk reaction

The committee reported that all the stakeholders it consulted, including trade and industry representatives as well as bankers, unanimously said that the discontinuation of L/C and LoU facilities had resulted in a 2-2.5 per cent increase in the cost of credit.

"The committee is of the considered opinion that discontinuation of the practice of issuance of L/Cs and LoUs for trade credit by the RBI was a knee-jerk reaction," the report said.

"The committee feels that the RBI got unnerved with the PNB fraud and it hastened the decision to ban L/Cs and LoUs without much thought and consideration," it added.

Consultation failure

The committee underlined the view that L/Cs and LoUs are globally accepted trade facilitating financial instruments and making them unavailable put Indian trade at a competitive disadvantage in global markets.

The PSCC roundly criticised the RBI for failing to consult stakeholders before taking its unilateral decision to ban L/Cs and LoUs.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.