Credit tangle : on LoU ban: Editorial 02 passage question

Credit tangle LoU ban:

Credit tangle : on LoU ban: Editorial 02 passage question

A month after the ? 12,800- crore letters of undertaking (LoUs) fraud at Punjab National Bank came to light, the Reserve Bank of India has decided to ban such instruments as well as letters of comfort issued by bankers to businesses for firefighting mode, unleashing all investigative agencies to probe the fraud, this is the first major step by the central bank on the issue, apart from asking banks to ensure there are no slip-ups between their core banking systems and the SWIFT mechanism used for international money transfers. LoUs are among the most popular instruments to secure overseas credit by importers- known as buyers’ credit in banking parlance- because of their attractive pricing. It is estimated that overall, Bank finance for imports in to India is around $140 billion, of which over 60% is funded through such buyers’ credit. Naturally, industry is unhappy with the RBI decision as this would raise the cost for importers, who will now need to rely on more expensive instruments such as Bank guarantee and letters of credit. The move will also impact the competitiveness of exporters who import raw materials for their products.
                                                                                 While the central bank had earlier blamed “delinquent behaviour by one or more employee of the bank” and failure of international controls for the PNB- Nirav Modi fiasco, RBI Governor Urjit Patel has finally commented on the fraud. Me. Patel said he had chosen to speak because the central bank also feels the anger and pain over the banking sector frauds that amount to “looting” the country’s future by “some in the business community, in cahoots with some lenders”. Reiterating that PNB’s internal system failed to take note of the RBI’s warnings about such risks, Mr. Patel took on severe criticism about the RBI’s inability to detect the fraud. He stressed that the RBI didn’t have adequate powers to regulate public sector banks, and it could not remove any of their directors or liquidate such a lender, as it can in the case of private sector banks. he made an eloquent demand that the owner of public sector banks ( that is, the governments ) must consider making the RBI’s powers over banks ‘ownership-neutral’ and say what could be done with these banks. the RBI’s stance is valid, as is it its discomfort with knee-jerk reactions and the blame games since the fraud came to light. In the vary same vein, its omnibus ban of LoUs will impact the $85 billion buyers’ credit market that was mostly conducted in accordance with the law of land. If an individual or some failed system of a bank were indeed to blame, why should bona fide transactions suffer? Perhaps the Rbi could have tightened the norms for LoUs and introduced safeguards based on the latest learnings. It is still not too late to do that.


  Answer the following questions:
1. Which of the following statement (s) is/ are TRUE in the context of the passage? .
     (a) The RBI has sufficient power to regulate public sector banks and can terminate any of their
           directors or lenders in accordance with Urjit Patel.
     (b) Barring around 40%, the rest of the the amount is funded by letters of undertaking (LoUs) for
           the purpose of imports in to India.
     (c) After the fraud Rs. 12,800 crores at Punjab National bank had come to light, the RBI’s decision
           made all the businessmen plausible.
      (1) only (a)                                        (2) only (b)
      (3) only (a) and (b)                            (4) only (a) and (c)

      (5) only (b) and (c)

2.  Buyer’s credit is related to what ?
     (a) Letter of comfort
     (b) Letter of credit
     (c) letter of undertaking
     (d) letter of debit

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