Letter of Undertaking in simple terms is bank guarantee issued by Indian bank against which overseas bank provide finance on Libor rates. Libor linked finance used by importers are Buyers Credit, Suppliers Credit, ECB etc. Libor linked finance used by exporters is PCFC (Packing Credit in foreign currency)
In earlier articles, terms Letter of Undertaking (LOU) and Letter of Comfort are used regularly. Below article gives difference between both these terms from perspective of buyers credit.
Difference between LOU and LOC
|Particular||Letter Of Comfort||Letter Of Undertaking|
|Definition||LoC in the banking parlance is referred to a document which is provided by a person, typically an affiliate (such as the holding / parent company) of the borrower (“LoC Provider”) assuring the financial soundness of the borrower to repay its debt(s).||A contract to perform the promise, or discharge the liability, of a third person in case of his default|
|Use||Between Branches or Partner Subsidiary||Inter-Bank|
|Basel III||Low Provisioning||High Provisioning|
|Charges to Customer **||Low||High|
If SBI India’s client takes buyers credit from SBI’s overseas branches, SBI India will give Letter of Comfort, whereas if the funding is arranged from say Bank of India overseas branches, SBI India will give LOU.
** On the point charges to customer. There are examples where if funds are arranged from overseas branches of same bank, Indian banks are charging differential pricing.
- When does a Letter of Comfort become a Contract of Guarantee ?
- Lucent Technologies Inc. vs Icici Bank Limited & Ors. on 13 October, 2009
- Bankwise Letter of Comfort / Undertaking Charges
- Sample format of Letter of Comfort / Letter of Undertaking
3 thoughts on “Difference Between Letter of Comfort and Letter of Undertaking”
In the context of the PNB LOUs reported to have been issued to Nirav Modi group, how does the liability of Nirav Group arise? Is it that on the basis of LOUs issued by Indian office of PNB, overseas branch of a bank extends credit to Nirav Group for import of diamonds? Kindly elucidate
Refer article: Implication on Buyers Credit because of PNB Fraud