Indian shares fall; bank stocks slip as cenbank bans LoUs

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The central bank RBI said the decision to discontinue LoUs and LoCs for trade finance comes into force with immediate effect.

RBI also barred lenders from issuing letters of comfort (LoC) as trade credit for importing goods into India with immediate effect.

The RBI notification further said that letters of credit and bank guarantees for trade credits for imports into India may continue to be issued in compliance with the provisions. The change in regulations may hit import dependent businesses and trade that are often reliant on LoUs to get bank guarantees.

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The RBI's action comes almost a month after PNB announced that it had detected fraudulent and unauthorised transactions at its Brady House branch in Mumbai.

In a court filing on Tuesday, police said PNB had filed a new complaint alleging it had been defrauded of an additional 9.42 billion rupees ($145 million) by the Gitanjali group of jewellery companies, taking the total amount allegedly defrauded by Choksi's group to 70.8 billion rupees ($1.09 billion).

"The acts of Shetty prima facie disclose commission of offence punishable under section 409 IPC along with other offences already alleged in the FIR", read the CBI's submission before the special court. A letter of credit, on the other hand, is used to establish the credit worthiness of the buyer in the purchase of goods. It will also put companies that have received credit based on LoUs in a spot, as they have to now repay their borrowings since there will no rollover of existing LoUs.

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"LOU was an additional route availed by Indian importers". It is used (by the importer) to pay for the imports into the country. The importer would negotiate the right price for these loans from the foreign branches of other Indian banks and then get these letters issued by a domestic bank.

An LoU is provided against a margin or a collateral which could be in the form of a fixed deposit.

While LOUs allow the customer of a bank to withdraw foreign currency from an Indian bank overseas, LOC is an assurance for payment extended by a third party for imports into India.

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