Editorial

Credit tangle: on LoU ban

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(उपकरण-समूह as well as letters of comfort issued by bankers to businesses for international transactions. While the government has been in firefighting mode, unleashing(उन्मुक्त) all investigative(जांच पड़ताल करने का) agencies to probe(छानबीन/जांच) the fraud, this is the first major step by the central bank on the issue

, apart from asking banks to ensure(सुनिश्चित) 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(विदेशी/समुद्र पार)credit by importers — known as buyers’ credit in banking parlance(भाषा/बोल-चाल)— because of their attractive pricing(मूल्य निर्धारण). It is estimated that overall, bank finance for imports into 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(भरोसा करना)on more expensive instruments such as bank guarantees and letters of credit. The move will also impact the competitiveness(प्रतिस्पर्धा) of exporters who import raw materials for their products.

While the central bank had earlier blamed “delinquent(अपराधी/दोषी) behaviour by one or more employees of the bank” and failure of internal controls for the PNB-Nirav Modi fiasco(नाकामयाबी/असफलता), RBI Governor Urjit Patel has finally commented on the fraud. Mr. 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(बराबर भागों) with some lenders(ऋणदाता)”. Reiterating(बार बार दुहराना) that PNB’s internal systems failed to take note of the RBI’s warnings about such risks, Mr. Patel took on severe(गंभीर/सख़्त) criticism(आलोचना/समीक्षा) about the RBI’s inability(असमर्थता) to detect(पता लगाना) the fraud. He stressed (प्रभाव डालना)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(वाजिब मांग) that the owner of public sector banks (that is, the government) must consider making the RBI’s powers over banks ‘ownership-neutral’ and say what could be done with these banks. The RBI’s stance(मुद्रा/ठान) is valid, as is its discomfort(बेचैनी) with knee-jerk reactions and the blame games since the fraud came to light. In the very same vein, its omnibus(सर्वग्राही) ban of LoUs will impact the $85 billion buyers’ credit market that was mostly conducted in accordance with the law of the land. If an individual or some failed systems 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.

Important Vocabulary

1.Parlance(भाषा/बोल-चाल)
Synonyms: argot, jargon, lingo, patois
Antonyms: standard, listening, silence

2.Rely(भरोसा करना)
Synonyms: await, bank, bet, build, calculate
Antonyms: disbelieve, disregard, ignore, keep, straighten

3.Delinquent(अपराधी/दोषी
Synonyms: offending, overdue, tardy, unpaid, behind
Antonyms: early, paid, behaving, careful, responsible

4.Fiasco(असफलता)
Synonyms: blunder, breakdown, debacle, disaster, embarrassment
Antonyms: accomplishment, achievement, miracle, success, triumph

5.Stressed (प्रभाव डालना
Synonyms: repeat, underline, underscore, accent, belabor
Antonyms: attenuate, reduce, relax

6.Severe(गंभीर/सख़्त
Synonyms: harsh, relentless, serious, strict, astringent
Antonyms: kind, amenable, calm, compromising, easy