{"id":30602,"date":"2018-10-26T16:55:28","date_gmt":"2018-10-26T11:25:28","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=30602"},"modified":"2018-10-26T16:55:28","modified_gmt":"2018-10-26T11:25:28","slug":"lou-ban-to-hit-importers-as-costs-rise","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/lou-ban-to-hit-importers-as-costs-rise\/","title":{"rendered":"\u2018LoU ban to hit importers as costs rise\u2019"},"content":{"rendered":"<p><a href=\"http:\/\/www.thehindu.com\/todays-paper\/tp-business\/lou-ban-to-hit-importers-as-costs-rise\/article23248373.ece\"><strong>\u2018LoU ban to hit importers as costs rise\u2019<\/strong><\/a><\/p>\n<p><strong>What happened?<\/strong><\/p>\n<p>The Reserve Bank of India\u2019s directive barring banks from issuing Letters of Undertaking (LoUs) has brought the $85 billion buyers\u2019 credit market \u2014 a key source of low-cost trade finance for the country\u2019s importers \u2014 to an abrupt standstill.<\/p>\n<p><strong>What is a LoU?<\/strong><\/p>\n<p>Letter of Undertaking is a bank guarantee and is issued for overseas import payments. A bank, while issuing LoUs for a client (like Nirav Modi), agrees to repay the principal and interest on the client&#8217;s loan unconditionally<\/p>\n<ul>\n<li>When a LoU is issued it involves an issuing bank, a receiving bank, an importer and a beneficiary entity overseas<\/li>\n<\/ul>\n<p><strong>Hurt importers and exporters<\/strong><\/p>\n<p>Many exporters used the LoUs to help fund their imports of raw materials and the central bank\u2019s decision would hurt their competitiveness<\/p>\n<p><strong>Cost of Credit will go up<\/strong><\/p>\n<ul>\n<li>The traders who have been conducting business through these instruments will now have to necessarily shift their transactions to Letters of Credit and Bank Guarantees<\/li>\n<li>The result would be that cost of credit may go up, especially for the SMEs<\/li>\n<\/ul>\n<p><strong>Worst affected sectors<\/strong><\/p>\n<p>Gems and jewellery sector was likely to be the worst affected by the LoU ban.<\/p>\n<p><strong>LIBOR-based pricing<\/strong><\/p>\n<ul>\n<li>LoUs were the cheapest source of funding as the credit provided against them were typically priced 20-30 basis points above the three-month or six-month LIBOR.<\/li>\n<li>Since the LoU route is no longer available, importers have to provide bank guarantees or letters of credit, which are more expensive.<\/li>\n<\/ul>\n","protected":false},"excerpt":{"rendered":"<p>\u2018LoU ban to hit importers as costs rise\u2019 What happened? The Reserve Bank of India\u2019s directive barring banks from issuing Letters of Undertaking (LoUs) has brought the $85 billion buyers\u2019 credit market \u2014 a key source of low-cost trade finance for the country\u2019s importers \u2014 to an abrupt standstill. What is a LoU? Letter of&hellip; <a class=\"more-link\" href=\"https:\/\/forumias.com\/blog\/lou-ban-to-hit-importers-as-costs-rise\/\">Continue reading <span class=\"screen-reader-text\">\u2018LoU ban to hit importers as costs rise\u2019<\/span><\/a><\/p>\n","protected":false},"author":61,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[555],"tags":[],"class_list":["post-30602","post","type-post","status-publish","format-standard","hentry","category-test-1","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704733148},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/30602","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/61"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=30602"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/30602\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=30602"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=30602"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=30602"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}