RBI had cautioned banks multiple times in 2016 on SWIFT misuse: Government

Jeannie Matthews
March 14, 2018

In the aftermath of Punjab National Bank (PNB) fraud case, a couple of banks had clamped down on the issue of LoUs.

In a major decision, the Reserve Bank of India (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 Rs almost 13,000 crore in connivance of bank officials.

According to recent reports, Punjab National Bank (PNB) has written a letter to Nirav Modi, the kingpin behind the largest banking scam, to repay the entire amount as soon as possible and also expressed their views of not agreeing to any kind of settlement with him.

Letters of Credit and bank guarantees for trade credits for imports into India will continue to be issued subject to compliance with the RBI provisions, added the statement.

An LoU is a document whereby the issuing bank guarantees its customer's payment obligation to an overseas supplier.

In today's plea before the special CBI court, the agency said it has filed another supplementary complaint about additional fraud of Rs 942 crore, taking the total amount of fraud to Rs 7,080 crore.

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LoUs were allegedly used by diamantaires Nirav Modi and his uncle Mehul Choksi to defraud the state-owned bank in connivance with its officials.

Thus, many Indian banks' overseas branches sanctioned forex credit.

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.

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".

Coming back to discontinuance, the central bank's decision is expected to impact businesses who are depended on imports, and needed LoUs for opting bank guarantees.

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