Indian exporters want the ban on letter of undertakings (LoUs) to be revoked as they say the ban will impact exports. LoUs are used by the gems and jewelry sector and by the textiles and leather industry. Gems and jewelry exports have contracted by a massive 36 per cent following the regulatory actions. And alternatives for LoUs like bank guarantees increase the cost by one or three per cent.

LoUs were banned following the discovery of the Nirav Modi scam, the biggest fraud in the domestic banking history early February. Letter of undertaking is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit.

For raising the LOU, the customer, the importer, is supposed to pay margin money to the bank that issues the LOU and accordingly they are granted a credit limit. Once the letter of credit is acknowledged and accepted, the lender (foreign branch of Indian bank) transfers money to the nostro account of the bank that has issued the LoU. Even in the labor intensive sectors, India is losing out on competitiveness to Bangladesh, Vietnam and Myanmar, which are taking the lead in apparel exports.