Business

PNB Fraud Fallout: RBI discontinues LoUs/LoCs issuance for trade credits

13 Mar 2018 | By Ramya Patelkhana
RBI asks banks to stop issuing LoUs/LoCs

Learning from the multi-crore PNB scam, involving jewelers Nirav Modi and Mehul Choksi, the Reserve Bank of India has decided to discontinue issuance of LoUs (letters of undertaking) and LoCs (letters of comfort) as trade credits for imports into the country.

It asked AD (Authorized Dealer) Category-I banks to stop the practice with immediate effect. Existing LoUs/LoCs, however, would be reportedly honored.

Here's more.

In context: RBI asks banks to stop issuing LoUs/LoCs

13 Mar 2018PNB Fraud Fallout: RBI discontinues LoUs/LoCs issuance for trade credits

RBI CircularLoCs, bank-guarantees to be issued subject to compliance with rules

"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," RBI stated.

However, the central bank added, "Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation."

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RBI's move to hit small importers

RBI's decision on issuance of LoUs and LoCs could adversely affect importers who depend on these letters for obtaining bank guarantees for imports. Indian Banks Association's Chief Executive Officer said that the central bank's move would have some impact especially on smaller importers.
Punjab National Bank reported fraudulent issuance of LoUs to RBI

FraudPunjab National Bank reported fraudulent issuance of LoUs to RBI

RBI's move comes after the state-run PNB reported fraud - including the issuance of LoUs or foreign LoCs for import bill payments and fraudulent transactions in accounts amounting to nearly Rs. 13,000cr - to the central bank through its fraud monitoring reporting system.

Investigation agencies like the CBI and Enforcement Directorate have launched a probe into the multi-crore PNB scam.

PNB EmployeesBanking fraud involved two junior PNB officials

The PNB scam allegedly involved two junior PNB officials at a Mumbai branch that issued letters of undertaking to companies linked to Nirav Modi and Choksi for them to get credit from overseas branches of other Indian banks, according to PNB's complaint.

The LoUs weren't recorded on PNB's internal software but transmitted through SWIFT interbank messaging system to avoid early detection of fraud.