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RBI Advises Banks to Focus on Global-Trade Finance Instruments
May 13, 2019
A paper published by the Reserve Bank of India (RBI) recommends that Indian banks should shift to trade finance instruments that are accepted globally instead of working with local instruments, like letter of credit (LoC) and letter of undertaking (LoU). It may result in increase of cost.
Banks in India are overly dependent on their branches overseas and accept non-standardised trade instruments, namely LoCs and LoUs, to arrange credit. As a result, it limits their trade credit operations. RBI had prohibited use of LoCs and LoUs in March 2018 and this has led to trade credit disbursal drying up. The reduction in trade finance has been attributed to constraints on the supply side.
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