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Don't issue LoUs, LoCs for now, RBI tells Banks in India

14 March 2018

The Economic Times daily, citing unnamed sources, reported earlier on Tuesday that PNB would honour claims by peer banks that issued credit to the jewellers, but with a few caveats.

PNB said the additional amount did not involve any fraudulent letters of undertaking, but was sanctioned credit to Gitanjali group that it was recalling and adding to the total amount defrauded.

According to reports about 30 banks had lent funds to firms related to Nirav Modi and his uncle Mehul Choksi based on the LOUs issued by PNB.

RBI also barred lenders from issuing letters of comfort (LoC) as trade credit for importing goods into India with immediate effect.

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Nirav Modi's firms had connived with PNB staff to extract LoUs worth crores - well beyond their prescribed timeline - to raise credit from foreign banks.

On January 31, the CBI had registered an FIR against Modi, Choksi and the PNB officials for having committed offences of cheating and fraud thereby, causing a loss of Rs 280.70 crore. Globally though, letters of credit and bank guarantees are the followed norm.

Indian investigators have so far arrested almost 20 people, including some senior executives of companies owned by Modi and his uncle Mehul Choksi as well as high-ranking officials of the Punjab National Bank, in the bank fraud probe. It also provided the LoU-issuing bank with a source of fee income. The money thus raised is used to make payment to offshore suppliers in for-eign currency. Such transactions went on for six years without detection.

Nirav Modi and Mehul Choksi.

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Ajay Sahai, Director General of exporters body Fieo said that the RBI decision should have very little impact on trade as bank guarantee and letter of credit continue to be available.

LoUs and LoCs are used widely in several industries including gems and jewellery, oil and gas, electronic goods, solar panels and metals.

The CBI too is probing the case.

The RBI had issued two circulars in 2016 to banks on strengthening the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, the misuse of which was unveiled last month in the Rs 12,600 crore fraud on state-run Punjab National Bank (PNB), Parliament was informed on Tuesday.

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Don't issue LoUs, LoCs for now, RBI tells Banks in India