RBI bars banks from issuing LoUs in Nirav scam fallout

RBI Stops Letters of Undertaking For Overseas Credit After PNB Fraud

The Reserve Bank of India has suspended letters of undertaking (LoUs) or assurances for overseas credit after the Rs. 12,600 crore Punjab National Bank (PNB) extortion was uncovered a month ago.

The money was later allegedly funnelled to shell companies set up by Modi and his uncle Mehul Choksi.

The CBI today told a Mumbai court that it has added the charge of "criminal breach of trust" to the case related to diamond trader Mehul Choksi's firms in the Punjab National Bank (PNB) fraud case. The new disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark.

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. The importer would negotiate the right price for these loans from the foreign branches of other Indian banks and then get these letters issued by a domestic bank. It will also put companies that have received credit based on LoUs in a spot, as they have to now repay their borrowings since there will no rollover of existing LoUs.

On a review of the extant guidelines, it has been chose to discontinue the practice of issuance of LoUs/LoCs for trade credits for imports into India by commercial banks with immediate effect, RBI said.

The banned LoUs and LoCs meant receiving banks depended completely on the issuing bank on creditworthiness.

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PNB says junior employees at the branch issued LoUs over the SWIFT interbank messaging system without entering any of these transactions on the bank's own system. The change in regulations may hit import dependent businesses.

Though Modi has not yet been arrested, India's External Affairs Ministry has revoked his passport as well as Choksi's for their involvement in the scam.

The PNB, the country's second-biggest state-run lender, filed a supplementary complaint to the Central Bureau of Investigation (CBI) on March 4 against Gitanjali Gems Ltd, Gill India Ltd, Nakshatra Brand Ltd and Asmi Jewellery India Ltd for the additional fraud amount.

Both Modi and Choksi are overseas and have refused to return to face trial.

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.

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