Don't issue LoUs, LoCs for now, RBI tells Banks in India

RBI Stops Letters of Undertaking For Overseas Credit After PNB Fraud

Watchdog scraps PNB scam tool

India's central bank for the first time scrapped the system of issuance of guarantees like Letters of Undertaking (LOU) and Letters of Comfort (LOC) in the wake of the biggest-ever bank fraud of 1.8 billion USA dollars.

The court filing said that the Gitanjali group of companies controlled by jeweller Mehul Choksi allegedly defrauded PNB of Rs 4,8886.72 crore regarding which the CBI filed a case on February 15.

In a statement to BSE, the bank clarified that this Rs 942 crore is an additional amount of fraud that is not related to LoUs/LoCs issued to Gitanjali Gems but is part of a loan given to the company by a consortium of banks.

Tuesday's disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark.

Law enforcement agencies had previously attributed 61.38 billion rupees of the alleged fraud amount to Gitanjali, and almost 65 billion rupees to companies controlled by Modi. These firms raised short-term credit from overseas branches of other Indian banks based on these LoUs.

LOUs and LOCs are by far the two main instruments issued by banks to domestic importers to enable them to receive foreign exchange from Banks at cheaper rates.

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Finance Minister Arun Jaitley told Parliament on Tuesday a total 1,213 fraudulent letters of undertaking were issued to Nirav Modi's companies between March 2011 and May 2017. Recent reports also highlight that, billionaire Modi has refused to join the CBI investigation related to the case, citing that he has a business overseas. Such transactions went on for six years without detection.

The RBI also banned with immediate effect issuance of letters of comfort which, like LoUs, are used by importers to fund their overseas purchases.

When Central government is looking upon Central Bureau of Investigation (CBI) for probe into the Punjab National Bank (PNB) fraud case, the agency headed by IPS officer Alok Kumar Verma expressed their limitation in expediting the investigation citing shortage of manpower.

According to him, LoUs were generally used by large players in gems and jewellery sector.

Punjab National did not immediately respond to requests for comment.

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