Letter of understanding

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A Letter of Undertaking or LOU is a formal text that sums up the terms and undertaking of a contract which mostly has been negotiated up to this point only in spoken form. It reviews the terms of an agreement for a service, a project or a deal and is often written as a step before a more detailed contract is issued.

The LOU may provide for example:

  • detailed summary of the work to be performed
  • tasks of the service provider and the receiver
  • milestones for the work to be done
  • work steps that have been accomplished already

In international banking system, Letter of Undertaking (LOU) is a provision of bank guarantee, under which a bank allows its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee. However, to be able to raise the LOU, the customer is supposed to pay margin money to the bank issuing the LOU and accordingly, he is granted a credit limit.[1]

The Letter of Undertaking may also introduce key contractual elements, like payment terms.


  1. ^ "What Is LoU? PNB Rs 11,300 Crore Nirav Modi Fraud Explained In 10 Points". NDTV.com. Retrieved 2018-02-17.

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