Issuance of LoU was banned in March by RBI after
its misuse was detected in the Punjab National Bank (PNB)’s scam. Recently
the parliamentary standing committee on commerce has sought immediate
restoration of issuance of LoUs and LoCs with proper safeguards.
What is LoU?
Letter of Undertaking
(LoU) --LoU Is an assurance given
by one bank to another to meet a liability on behalf of a
customer.
The LoU is akin to a Letter for Credit or a Guarantee.
LoUs are used in international banking transactions. LoU is issued for overseas import remittance
(Money received from abroad) and involves four parties – an issuing bank, a
receiving bank, an importer and a beneficiary entity overseas.
According to norms, the term of a LoU, and can
be rolled over once for six months. Since LoUs are form of lending, they
are typically backed by security.
What is CBS?
CBS refers to Core Banking
System—Core banking system is a working way of Banks. Usually
all branches of the banks are interconnected and the benefit is that, the
customer can access all services of the Bank from anywhere in the world.
What SWIFT ?
SWIFT is a very important in core banking system
as when an LoU is issue the message of credit transfer is conveyed (tells)
to overseas banks through the Society for Worldwide Interbank Financial
Telecommunication (SWIFT) System.
In simple words, the SWIFT system records the
message of all ongoing transactions between Bank at International level. However, it only tells about the transaction but
does not tell the money associated with the transfer.
This is a significant information as it gives
the bank’s consent and guarantee.
To issue SWIFT, an official has to log in and
fill up secret information such as the account number and SWIFT code.
It
generally has three layers of security – maker, a checker and a verifier
within the core banking system before it is issued.
What is Letter of Credit?
LoC -- A letter of credit is a letter from a bank guaranteeing
that a buyer’s payment to seller will be received on time and for the correct
amount. In the event that the buyer is unable to make payment on the purchase, the
bank will be required to cover the full of remaining amount of the purchase.
