In what seems like a direct fallout of the multi-crore PNB scam involving jewellers Nirav Modi and Mehul Choksi, the Reserve Bank of India (RBI) on Tuesday discontinued issuance of Letters of Undertaking + (LoUs) by banks for trade credits for imports into India. The move will come into effect immediately, the central bank said in a statement.

The RBI has asked commercial lenders to provide it with details of all letters of undertaking – a form of credit guarantee at the centre of an alleged $2 billion fraud – issued by them in the past several years, according to four bankers who have seen the directive.

To recap, Punjab National Bank reported fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs 12,967.86 crore, to the RBI through its fraud monitoring reporting system.

LoUs are bank guarantees + under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank.

The central bank’s move may hit businesses which are dependent on imports, who are often reliant on LoUs to get bank guarantees.

The RBI notification further said that Letters of Credit and Bank Guarantees for trade credits for imports into India may continue to be issued subject to compliance with the provisions.

Incidentally, on Tuesday, Finance Minister Arun Jaitley in a written reply to the Rajya Sabha said that Nirav Modi obtained his first fraudulent guarantee from PNB’s Brady House branch in Mumbai on March 10, 2011 and managed to get 1,212 more such guarantees over the next 74 months.

Source : https://m.timesofindia.com/business/india-business/rbi-scraps-bank-lous-in-the-aftermath-of-pnb-fraud/articleshow/63287397.cms