The Finance Ministry recently asked central public sector undertakings (CPSUs) to issue letters of comfort (LoCs) based on their own financial strength.
About Letter of Comfort (LoC):
- What is it? An LoC is a letter issued to a lending institution by a stakeholder of the company acknowledging the support of the attempt for financing asked by that company.
- They are usually issued by a third party or a stakeholder in the transaction.
- For instance, a holding company can give an LoC on behalf of its subsidiary, or a government can issue a letter of comfort for PSUs.
- It is not legally binding and does not imply that the parent company guarantees repayment of the loan being sought by the subsidiary company.
- It merely gives reassurance to the lending institution that the parent company is aware of the credit facility being sought by the subsidiary company and supports its decision.
- This provides some comfort to the financial institution to lend money for the short term or long term.
- It, thus, is a moral rather than a legal obligation for the borrower.
- It can also be issued by banks, NBFCs, and auditors.
- It lays down the contract conditions and steps to complete the transaction successfully.
Q1) What is a Letter of Guarantee?
A letter of guarantee is a contract issued by a bank on behalf of one of their customers who has entered into a contract to buy goods or services from a supplier. The letter of guarantee lets the supplier know that they will receive payment, even if the bank customer defaults.
Source: PSUs Asked To Issue LoCs Based On Their Financial Strength