RBI scraps bank LoUs in the aftermath of PNB fraud
NEW DELHI: 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 Letter of Understanding (LoUs) by banks for trade credits for imports into India. The move will come into effect immediately, the central bank said in a statement.
To recap, Punjab National Bank reported the 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 might continue to be issued subject to compliance with the provisions.