POST-PNB, RBI BARS BANKS FROM ISSUING LOUs

In the wake of the `12,900 crore scam detected at Punjab National Bank (PNB), the Reserve Bank of India (RBI) on Tuesday decided to discontinue the practice of issuance of letter of undertakings (LoU) or letter of comfort for trade credits for imports into India with immediate effect.

In the wake of the `12,900 crore scam detected at the Punjab National Bank (PNB), the RBI on Tuesday decided to discontinue the practice of issuance of letter of undertakings (LoU) or letter of comfort (LoC) for trade credits for imports into India with immediate effect.

However, the Reserve Bank has allowed banks to issue letters of credit and bank guarantee for trade credits for imports into India subject to compliance with the relevant provisions.

The latest circular comes in the backdrop of the multi-billion dollar scam unearthed at one of the branches of PNB wherein a bank official fraudulently issued letters of undertaking (LOUs) on behalf of some companies belonging to Nirav Modi group for availing buyers credit from overseas branches of Indian banks through SWIFT.

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.

Though the latest decision would cause disruption in trade finance for importers who have been relying on these instruments, experts said that the move would help bring such trade transactions under a more legal and structured route.

“LOU was an additional route availed by Indian importers. Those who have been enjoying this facility would suddenly find themselves cut-off from this trade-financing channel. This is clearly a risk mitigating step as letter of credit are governed by Uniform Customs and Practice for Documentary Credits, which has a well defined set of rules and procedures,” said a senior official at one of the public sector banks.

Fugitive jeweller Nirav Modi obtained his first fraudulent guarantee from PNB's Brady House branch in Mumbai on March 10, 2011 and managed to get 1,212 more such guarantees over the next 74 months, said Arun Jaitley.