Difference Between Letter of Comfort and Letter of Undertaking

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

Example

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.

Reference

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