State-owned NBFCs permitted to issue LOCs

28 Jun 2022 , 09:21 AM

Finance Ministry has modified its earlier directive to allow state-owned NBFCs to issue “Letters of Comfort” (LOCs) to banks for the purpose of securing funding for infrastructure projects.

A letter of comfort is a guarantee made by a third party to a bank regarding a debt that falls short of a legal guarantee.

In an effort to increase budgetary management transparency, the finance ministry had earlier in March requested that other ministries and agencies refrain from issuing “Letters of Comfort” to any contracted organization for carrying out projects on their behalf.

According to a finance ministry office memorandum dated June 10: “In light of the aforesaid and taking into account the fact that the CPSE-NBFCs are significant participants in the infrastructure sector, it has been determined that CPSE NBFCs may issue LOCs.”

The memorandum, which was released on the website of the finance ministry on Monday, outlined a number of requirements, one of which was that the lender must be an NBFC (Non-Banking Finance Company) that is registered with the RBI.

According to the statement, NBFCs should be active in the infrastructure sector and banks should only offer LOCs to form letters of credit for the provision of products and services by overseas suppliers.

The obligation under this LOC should never fall on the government of India, it was emphasized.

The finance secretary and the secretary of spending gave their consent for the memorandum to be released.