Feb 17, 2018

Understanding - Letter of Undertaking.

Stay Alert - Series 9

What is Letter of Undertaking (LoU)?
Letter of Undertakings are forms of lending issued by one Bank to the overseas branches of other Banks as an assurance to meet a liability on Customer’s behalf .
Bank issues LoUs for their Customer, agrees to repay the principal along with interest on Customer’s loan unconditionally. LoU involves 4 parties i.e. issuing Bank, a receiving Bank, an importer and a beneficiary entity overseas. LoUs which represent Bank’s consent are always backed by eligible security. The present norms by the Reserve Bank of India (RBI) have specified the LoUs term to be 180 days. LoU can be rolled over once for a six months period. The LoUs are cleared using SWIFT instructions from Bank to Bank. The communications on issuance confirmation occurs Bank to Bank over Swift messages.
What is Swift?
Society for Worldwide Interbank Financial Telecommunication (Swift) system. When a LoU is issued, the message of credit transfer is conveyed to overseas banks through Swift. It generally has rigorous 3 layers of checking mechanism comprising a maker, checker and a verifier before it’s sent across. To issue SWIFT, an official has to log in and fill confidential information such as the account number and swift code.
What is CBS?
CBS signifies to Core Banking System where all branches are inter-connected to ensure that the bank Customers - regardless of their home branch - are able to operate their account and transact in any of the member branch located anywhere in the world. All the transactions are rationalised real-timeAfter the introduction of this system, a customer is no more customer of a branch, but s/he becomes customer of bank .
In order to secure the process, SWIFT and CBS systems should be interconnected to track the issuance and payments of LoUs.

Stay Alert, Stay Safe. 

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