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6) What are Letters of Undertaking (LoUs) and letters of comforts (LoCs) that are issued by banks? Recently the Reserve Bank of India (RBI) banned both LoUs and LoCs. Examine the causes and consequences.

Topic Indian Economy and issues relating to planning, mobilization of resources, growth, development and employment

6) What are Letters of Undertaking (LoUs) and letters of comforts (LoCs) that are issued by banks? Recently the Reserve Bank of India (RBI) banned both LoUs and LoCs. Examine the causes and consequences. (250 Words)

The Indian Express

 

Why this question?

It’s in news thanks to Nirav Modi issue. This questions tests your basics about this issue.   

Key demand of the question:

Plainly define what’s LoU and LoC. Next, write causes and consequences of banning them (why didn’t RBI band them earlier?!?)  

Directive Word:

Examine:  Write related information as per demand of the question.  Your opinion not needed(except in the intro and conclusion may be, that too based on the issue in question)  

Structure of Answer:

In the introduction write 2-3 lines about RBI’s central role in regulating banking frauds and how its latest measure may be too late.  

Define LoU and LoC with examples.

In the body, divide answer into Causes and Consequences: First part, give reasons why RBI has banned them. In the Second part, explain likely impact on various stakeholders (banks, traders, stock market etc).

In the conclusion write why RBI should be more proactive in preventing bank frauds to restore public faith in institutions including RBI. 

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