By now, you would have come across the term ‘letter of undertaking’ (LoU), in the context of investigations into the alleged multi-crore fraud involving the Punjab National Bank and the credit facilities it offered to some jewellers. At the core of this investigation are some LoUs that were allegedly issued fraudulently. So, what are LoUs? LoU is an undertaking provided by one bank to another bank, in favour of or on behalf of a customer. Let’s cut through the jargon and look at them in greater detail.
Who gets an LoU
LoUs are used by a bank’s customer to avail short-term credit in a foreign country. These transactions are not retail in nature and are mostly used by businesses for import of goods.
The borrower uses her existing credit relationship with a bank in India to avail the required credit outside the country. “An authorised dealer may give a guarantee, letter of undertaking or letter of comfort in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India (being an overseas supplier of goods, bank or a financial institution), for import of goods, as permitted under the Foreign Trade Policy…,” the Reserve Bank of India (RBI) had said in its directives for import of goods and services. It can be read here.
