Weeks after PNB fraud, RBI stops use of LoUs for overseas credit

New Delhi: The Reserve Bank of India today discontinued Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits, after the Rs 12,968 crore Punjab National Bank (PNB) fraud was unearthed last month.

“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 RBI said in a circular.

The RBI debarred the banks from issuing LoUs, the tools which were allegedly exploited by jewellers Nirav Modi and his uncle Mehul Choksi to perpetrate the $2 billion PNB fraud in connivance with few officials of Punjab National Bank.

The move will come into effect immediately, the central bank said in a statement.

However, banks can continue to issue guarantees and letter of credit for trade purposes which are the international norm.

The circular added that the Letters of Credit will be continued to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular on ‘Guarantees and Co-acceptances’ dated July 1, 2015.

Recently, Punjab National Bank reported the fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs 12,967.86 crore, to the RBI through its fraud monitoring reporting system.

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.

A multi-agency probe, including by CBI and ED has been launched into the PNB fraud.

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