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RBI scraps LoUs from banks for trade credit

THE ASIAN AGE.
Published : Mar 14, 2018, 2:00 am IST
Updated : Mar 14, 2018, 2:01 am IST

According to reports, about 30 banks had lent funds to firms related to Mr Modi and Mr Choksi based on the LoU’s issued by PNB.

Nirav Modi and Mehul Choksi, key accused in Rs. 11, 400 crore Punjab National Bank scam. (Photo: PTI)
 Nirav Modi and Mehul Choksi, key accused in Rs. 11, 400 crore Punjab National Bank scam. (Photo: PTI)

Mumbai: In a major decision, the RBI on Tuesday banned banks from issuing Letters of Undertaking (LoUs) — instruments used allegedly by diamantaire Nirav Modi and his uncle Mehul Choksi to defraud state-owned PNB of nearly Rs 13,000 crore in conniva-nce of bank officials.

The RBI said the decision to discontinue the practice of LoUs and Letters of Comfort (LoCs) for trade finance comes into force with immediate effect.

However, the RBI has allowed banks to issue letters of credit and bank guarantee for trade credits for imports into India subject to complia-nce with the provisions.

The latest circular comes in the backdrop of the multi-billion dollar scam unearthed at one of the branches of PNB where banks official fraudulently issued LoUs on behalf of some companies belonging to Mr Modi group for availing buyers credit from overseas branches of Indian banks through Society for Worldwide Interbank Financial Telecommunication. 

According to reports, about 30 banks had lent funds to firms related to Mr Modi and Mr Choksi based on the LoU’s issued by PNB. 

Though the latest decision will cause disruption in trade finance, 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. 

The RBI has already started a special audit of public sector banks wherein it will closely scrutinise their trade financing activities especially with regards to the issuances of LoUs. The massive fraud, which rattled the financial markets over the past one month, has so far seen the arrest of over a dozen individual from banks and private entities associated with Mr Modi and Mr Choksi. 

Tags: nirav modi, mehul choksi