The Reserve Bank of India has scrapped quasi bank guarantee instruments such as the Letter of Undertaking and Letter Comfort.

The Reserve Bank of India has scrapped quasi bank guarantee instruments such as the Letter of Undertaking and Letter of Comfort that blew a Rs. 14,000 crore hole in the books of Punjab National Bank as the regulator attempts to plug a loophole and improve banks’ due diligence in trade credit  

According to the international standard, banks can continue issuing guarantees and letters of credit for commercial purposes, they also have characteristics that strengthen the demand of the issuer.
Guarantees and LoCs involve receiving banks conduct their own credit appraisal on companies before accepting them which reduces the risk of defaults, said bankers. On the other hand, the Letter of Undertaking and Letter of Comfort which were banned, led to receiving banks depending completely on the issuing bank on creditworthiness.