The Reserve Bank of India (RBI) on Tuesday disallowed banks from issuing letters of undertaking (LoUs) or guarantees for trade credits for imports into India. The move comes in the aftermath of a Rs 14,000-crore LoU-linked fraud unearthed at Punjab National Bank (PNB). However, letters of credit and bank guarantees for trade credits for imports into the country will be permitted provided they meet RBI conditions. “On a review of the extant guidelines, 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,” the RBI said. An LoU is issued as an undertaking that the issuer will honour a lender’s obligations if the borrower fails to do so. While bank guarantees are an internationally accepted instrument, LoUs are mostly issued by banks in India and used by importers to raise money from foreign branches of Indian banks. PNB has recently disclosed that it has been duped by companies associated with Nirav Modi and Mehul Choksi aided by a few junior officers of the bank. According to the lenders complaint to investigating agencies, the junior officers have been issuing fraudulent LoUs without registering them on the bank’s books.
According to an initial first information report (FIR) filed by the Central Bureau of Investigation (CBI), a deputy general manager in the bank’s Mumbai zonal office had filed a complaint with the CBI stating that Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Chinubhai Choksi, all partners of Diamond R US, Solar Exports and Stellar Diamonds, in conspiracy with officials of PNB cheated the bank and caused a loss of Rs 280.7 crore in 2017. In subsequent communications and hearings with the investigating agencies, the quantum of fraud was revised to Rs 14,000 crore.