PNB fraud case: RBI discontinues system of issuing Letters of Undertaking system

PNB fraud case: RBI discontinues system of issuing Letters of Undertaking system”

Both Modi and Choksi have denied any wrongdoing. Police say they left India in January, before the initial complaint was filed, and their whereabouts are unknown.

The RBI, in a notification to all banks, said it has chose to discontinue the practice of issuance of LoUs and letters of comforts (LoCs) for trade credits for imports into India by banks with immediate effect.

Banks can continue to issue guarantees and letter of credit for trade purposes which are the worldwide norm, and also have features that makes the claim on the issuer strong. This is essentially a short-term foreign currency loan on which banks charge say 60 to 90 basis points over the London Interbank Offered Rate or Libor - the global benchmark for pricing loans or lending. A LoU is a promise by the issuing bank to pay in case of default by the one on whose behalf it was issued. The current exposure takes the overall amount in the Nirav Modi scam to around Rs 13,400 crore.

"LoUs and LoCs don't come under a normal credit sanction".

A lawyer for Choksi said he was unaware of the new allegations and declined to comment.

Law enforcement agencies had previously attributed 61.38 billion rupees of the alleged fraud amount to Gitanjali, and almost 65 billion rupees to companies controlled by Modi.

It all started on February 14, when Punjab National Bank (PNB) revealed that it was cheated by two big diamond jewelers namely Nirav Modi and Gitanjali Gem's Mehul Choksi with the connivance of some officials.

PNB did not immediately respond to requests for comment.

The alleged fraud has shaken India's banking sector, leading to a government and central bank crackdown on lenders' systems and practices.

Thus, the earlier master circulation of RBI said, "Banks should not extend any non-fund based facilities or additional/ad-hoc credit facilities to parties who are not their regular constituents, nor should they discount bills drawn under LCs, or otherwise, for beneficiaries who are not their regular clients".

PNB has said it will honour only "bona fide" commitments, arguing other banks that lent to the jeweller groups shared in the blame by not carrying out adequate checks. The RBI had said it confidentially cautioned and alerted banks of such possible misuse, at least on three occasions since August 2016, advising them to implement safeguards and about the potential malicious use of the SWIFT infrastructure.

The central bank has also mandated commercial banks to put in place adequate audit and compliance mechanisms with bank board-level reporting through the audit committee of the board, the minister added.

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