Letter of Undertaking (LoU)

Why in news?

It is now clear that the recently revealed scams are fundamentally and overwhelmingly a failure of regulation.

The PNB scam relied on the existence of an unusual financial instrument, the LoU

FACTS FOR PRELIMS

This is a bank guarantee that enables a bank’s customer to raise short-term credit from another Indian bank’s foreign branch

It has to be another Indian bank, because the LoU as a form of underwriting other borrowing does not exist in other countries and is not even recognised by foreign banks

It was created by the RBI as an additional incentive to importers who could then avail of cheaper credit abroad, even though import credits already exist

SOURCE – THE HINDU.