Banks argue over pearl rules

A grey area in the Reserve Bank of India (RBI) guidelines on credit facilities for import of pearls has led to a conflict between public sector banks embroiled in the ~114-billion scandal related to fake issuance of Letters of Undertaking (LoUs) by Punjab National Bank.

There is nothing specific on availing of credit facility for trade of pearls, bankers note. The group of companies belonging to Nirav Modi and Mehul Choksi had sought loans for import of new pearls, PNB has told the investigative agencies.

“If you go back and look at old circulars issued by RBI, it used to refer to pearls separately. But, somewhere down the line. It seems the regulator removed it, creating ambiguity among bankers,” a senior executive said. Adding that the ministry of commerce and industry had also classified ‘pearls’ as a separate trade product.

Government-owned PNB has said it will meet only the genuine liabilities, indicating other banks might have to share the burden. It feels the foreign branches of the other banks did not do the needed due-diligence before depositing money into PNB’s foreign accounts, then transferred to the supplier companies of the Nirav Modi and Mehul Choksi groups.

PNB had said in its complaint to the Central Bureau of Investigation (CBI) that RBI prescribed credit for import of semi-precious and precious stones up to 90 days but the credit allowed in most cases was for about 360 days. PNB categorised pearls as semi-precious and precious stones in presenting its argument.

“This should have evoked suspicion in the minds of overseas branches of Indian banks extending buyers credit. These banks never raised any alarm on violation of RBI guidelines and continued to provide funding against the fraudulent LoUs,” goes PNB's complaint.

However, the other banks argue that pearls come under the non-capital goods category, for which LoUs may be issued for up to one year or till the operating cycle of the importer, whichever is less, by the RBI guidelines. Those affected are State Bank of India, Bank of India, Axis Bank, UCO Bank, Canara Bank and Allahabad Bank.

Other banks argue pearls come under non-capital goods category, for which LoUs may be issued for up to a year