State-owned NBFCs are authorized to issue letters of credit

The Ministry of Finance amended its previous directive to allow state-owned NBFCs to issue “Letters of Comfort” (LOC) to banks for the purpose of financing infrastructure projects.

A letter of comfort is a guarantee given by a third party to a bank concerning a claim that does not benefit from a legal guarantee.

In an effort to increase transparency in budget management, the Ministry of Finance earlier in March requested that other ministries and agencies refrain from issuing “comfort letters” to any organization contracted to carry out projects in their name.

According to a Department of Finance memo dated June 10: “In light of the above and considering that CPSE-NBFCs are significant players in the infrastructure sector, it has been determined that CPSE-NBFCs can issue letters of credit.

The memorandum, which was posted on the Ministry of Finance website on Monday, set out a number of requirements, one of which was that the lender must be an RBI-registered NBFC (non-bank financial company).

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 foreign suppliers.

The obligation under this LOC should never rest with the Government of India, it was stressed.

The Secretary of Finance and the Secretary of Expenses have given their consent for the memorandum to be published.

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