Public Sector Banks Asked to Issue LoCs Based on Their Financial Strength

The Finance Ministry has requested central public sector undertakings (CPSUs) to situation letters of consolation (LoCs) on the premise of their very own monetary power in order that no legal responsibility devolves on the Government of India. The Office Memorandum dated March 20, 2023, has been issued following a request from some CPSUs within the oil and energy sector searching for rest with regard to the issuance of LoCs.

“In view of necessities, it has been determined that CPSUs could situation LoCs on its personal monetary power and all such LoCs shall solely be issued after particularly inserting the next clause–not at all, the legal responsibility below this Letter of Comfort shall devolve on the Government of India,” the memorandum said.

Under the provision of the fiscal responsibility law, the budget requires to provide details of guarantees given by the government.

It further clarified that ministries and departments will not issue any letters of comfort as specified under the Office Memorandum dated March 31, 2022 on behalf of the Government of India.

Issuance of LoCs based on own financial strength is a part of regular business practice.

It enables these entities to raise resources at competitive rates for their capex or working capital needs as well as furthering the business interests of their joint ventures or subsidaries or Group companies.

It is to be noted that the finance ministry last year permitted state-owned NBFCs to issue ‘Letter of Comfort (LOC)’ to banks for fund tie-up for infra projects.

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