RBI bars issuance of letters of undertaking for trade credit

Galtero Lara
Marcha 14, 2018

With the fraudulent letter of undertaking (LoU) scam aggregating ₹12,600 crore at Punjab National Bank shaking the banking system, the Reserve Bank of India on Tuesday asked banks to discontinue issuance of LoU/Letter of Comfort (LoC) for trade credits for imports into India with immediate effect.

RBI said in a notification, "On a review of the extant guidelines, it has been made a decision to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category -I banks with immediate effect".

"This regulation will certainly help global banks that were earlier outpriced by Indian banks, to get back to financing genuine trade finance transactions of Indian corporates and support Indian imports, though withholding tax would add to the cost of the importers", said Joiel Akilan, ED & chief representative-India of BBVA, one of Europe's leading banks.

The RBI added that the aforesaid Master Direction will be updated to reflect the changes.

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Punjab National Bank has told police that it has uncovered additional exposure of about Rs 9.42 billion ($145.2 million) in connection with a massive alleged fraud, according to a court filing on Tuesday seen by Reuters.

The Parliamentary Standing Committee on Finance, headed by Congress member M Veerappa Moily, in a report, had said that "international branches of many Indian banks including State Bank of India, Union Bank of India, Allahabad Bank, Axis Bank and some foreign banks, lent money to a particular entity or many entities or companies based on these alleged fraudulent guarantees". By giving LoU, PNB agrees to repay the principal amount and interest on the clients (Nirav Modi) loan unconditionally.

Apart from diamond trader Nirav Modi and his uncle Mehul Choksi, some PNB employees have been accused of misusing their access to the bank's SWIFT electronic messaging system used for overseas funds transfers. They did not have any pre-approved credit limit either.

The buyer's credit usually goes to an overseas nostro account from where the payment to the importer's bank is made. Recent reports also highlight that, billionaire Modi has refused to join the CBI investigation related to the case, citing that he has a business overseas.

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