Home Business PNB fraud case effect: RBI stops use of LoUs for overseas credit

PNB fraud case effect: RBI stops use of LoUs for overseas credit

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(G.N.S) Dt. 13
Mumbai
In what could be a fallout of the Nirav Modi-led PNB scam, the Reserve Bank of India has discontinued LoUs and Letters of Comfort as instruments of trade credits.
The RBI, in a circular, said,”it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect.”
The Reserve Bank of India (RBI) on Tuesday banned banks from issuing Letters of Undertaking (LoUs)—instruments used allegedly by jewellers Nirav Modi and his uncle Mehul Choksi to perpetrate the $2 billion PNB fraud in connivance with officials of Punjab National Bank.
RBI said the decision to discontinue the practice of LoUs and Letters of Comfort (LoCs) for trade finance comes into force with immediate effect.
“On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/LoCs for trade credits for imports into India by AD Category–I banks with immediate effect,” the central bank said in a notification.The move could potentially hit the importers who rely on letters of undertaking and letters of comfort to get bank guarantees for their imports.
The RBI said its decision to scrap the practice of issuing LoUs is effective immediately. “On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/LoCs for Trade Credits for imports into India by AD Category I banks with immediate effect,” the central bank said in a notification.
Nirav Modi and the firms he controls allegedly leveraged the loopholes in the banking system by seeking LoUs and raising credit from foreign banks to pay their merchants.
In the aftermath of the Nirav Modi-led Punjab National Bank (PNB) scam, some banks clamped down on the issue of Letters of Undertaking (LoUs).
Punjab National Bank reported fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs12,967.86 crore, to RBI through its fraud monitoring reporting system.
Even PNB and other lenders are slugging out over the loan term, which should not have been extended beyond 90 days, says PNB.
PNB has told police that it has also uncovered additional exposure of about Rs. 9.42 billion in connection with a massive fraud, according to a court filing.
PNB last month said it had been defrauded of about Rs. 12,600 crore by two jewellery groups who raised credit from overseas banks based on fraudulent guarantees issued in collusion with rogue PNB staff.
A multi-agency probe, including by CBI and ED, has been launched into the PNB fraud. The RBI notification further said that letters of credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with the provisions.According to a report in a newspaper, banks like Canara bank, IDBI bank and Axis bank either cut back or stopped issuing LoUs for certain categories after the PNBBSE 3.59 % made it public that Nirav Modi along with some employees of the bank pulled off a Rs 12,600 crore scam.

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