Published: Wed, March 14, 2018
Finance | By Loren Pratt

PNB fraud case: RBI discontinues system of issuing Letters of Undertaking system

PNB fraud case: RBI discontinues system of issuing Letters of Undertaking system

PNB, the second-biggest Indian state-run lender, uncovered in January the alleged fraud in which certain bank officials were suspected of colluding with Modi and Choksi to issue fraudulent letters of undertaking (LoUs) for their firms to raise loans from overseas branches of mostly Indian banks.

The Reserve Bank of India has discontinued Letters of Undertaking (LoUs) or guarantees for overseas credit after the Punjab National Bank (PNB) fraud.

"It has been chose to discontinue the practice of issuance of LoUs/ LoCs (Letters of Comfort) for trade credits for imports into India by AD Category-I banks with immediate effect", the notification said. The CBI has in its two FIRs filed on the PNB scam accused that fake LoUs were issued without keeping any margin money as security.

Thus, the earlier master circulation of RBI said, "Banks should not extend any non-fund based facilities or additional/ad-hoc credit facilities to parties who are not their regular constituents, nor should they discount bills drawn under LCs, or otherwise, for beneficiaries who are not their regular clients". It is used (by the importer) to pay for the imports into the country.

The central bank has also mandated commercial banks to put in place adequate audit and compliance mechanisms with bank board-level reporting through the audit committee of the board, the minister added.

The RBI decision could potentially push up the cost of imports by up to half a percentage point, besides putting foreign banks on an even keel with Indian banks in financing imports, bankers said. The payment can also be made directly to the importer. The RBI's decision will be applicable with immediate effect. "The instrument (LoU/LoC) is being blamed, taking the focus away from the system failure in PNB", Sanjay Mandavia, an expert on trade finance who arranges buyers credit for SMEs, told The Telegraph.

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