RBI bans all Indian banks from issuing LoUs, LoCs


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.

"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 AD Category banks with immediate effect", the central bank said in a notification.

Experts said the RBI's move to bar LoUs could affect genuine importers.

The alleged fraud at state-owned Punjab National Bank (PNB), involving diamond traders Nirav Modi and Mehul Choksi, has taken a new twist as the amount rose to Rs 12,700 crore from previous Rs 11,400 crore, putting the health of gems and jewellery sector's growth at stake.

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The bank has also filed criminal complaints with CBI and the ED, both of which launched nationwide searches on dozens of offices and residences of the alleged fraudsters.The bank has named Modi's brother, his American wife Ami, and uncle Choksi besides some others in the FIR. Bankers say the scrapping of LoU/LoC is unlikely to impact trade credit as banks can issue Letters of Credit (LC) and Bank Guarantees for trade credits for imports.

India's central bank ordered commercial banks on Tuesday to stop issuing with immediate effect guarantees in the form of letters of undertaking - which are at the heart of the country's biggest bank fraud - in the latest regulatory clampdown. According to a court filing seen by Reuters, the police also told the court that Mehul Choksi's companies controlled by billionaire Nirav Modi defrauded the lender of Rs 708 crore.

The buyer's credit usually goes to an overseas nostro account from where the payment to the importer's bank is made.