After PNB scam, RBI discontinues LoUs and LoCs for trade credits

After PNB scam, RBI discontinues LoUs and LoCs for trade credits

The Rs 12,700-crore fraud at Punjab National Bank has prompted the Reserve Bank of India to ban the use of letters of undertaking (LoUs) and letters of comfort (LoCs).

According to an RBI notification, the move will come into effect immediately.

The CBI today told a Mumbai court that it has added the charge of "criminal breach of trust" to the case related to diamond trader Mehul Choksi's firms in the Punjab National Bank (PNB) fraud case. This buyer's credit is provided on the basis of an LoU, which is akin to a guarantee and is issued by the importer's local bank.

"This regulation will certainly help global banks that were earlier outpriced by Indian banks, to get back to financing genuine trade finance transactions of Indian corporates and support Indian imports, though withholding tax would add to the cost of the importers", said Joiel Akilan, ED & chief representative-India of BBVA, one of Europe's leading banks. The guaranties are given for import of all non-capital goods permissible under the Foreign Trade Policy (except gold), and up to three years for import of capital goods.

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A lawyer for Gitanjali group's head, Mehul Choksi, said he was unaware of the new allegations and declined to comment. By giving LoU, PNB agrees to repay the principal amount and interest on the clients (Nirav Modi) loan unconditionally.

Companies belonging to Modi and Choksi allegedly colluded with employees of Punjab National Bank's Brady House branch in Mumbai to obtain fraudulent LoUs, without providing any margin money as security.

During issuance of LoU, there are four parties involved - issuing bank, receiving bank, importer and beneficiary entity overseas. None of the fraudulent transactions were registered on the bank's internal transaction messaging system, the Core Banking Solution (CBS), enabling the fraud to go undetected for long.

He further said that PNB has appraised that it has taken several steps to ensure that such unauthorised activities are not repeated.

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