New Delhi, Mar 13, 2018 : The Reserve Bank of India has discontinued Letters of Undertaking (LoUs) or guarantees for overseas credit after the Punjab National Bank (PNB) fraud. The LoU credit is ideally meant for short-term only. It also serves the purpose of a bank guarantee for a bank’s customer for making payment to its offshore suppliers in foreign currency.
In the Nirav Modi-Mehil Choksi case, the term of loan was allegedly extended far beyond what is prescribed as per the rule book.
The RBI said the decision to discontinue the practice of issuing LoUs for trade finance comes into force with immediate effect. "On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/LoCs for Trade Credits for imports into India by AD Category I banks with immediate effect," the central bank said in a notification.
Nirav Modi, and the firms he controls, allegedly leveraged the loopholes in the banking system by seeking LoU and raising credit from foreign banks to pay its merchants.
For the past seven years, Nirav Modi and his three firms - Diamond R Us, Solar Exports and Stellar Diamonds - had been allegedly taking LoUs from the PNB’s Brady Road branch in Mumbai.
These bank guarantees allegedly helped Mr Modi raise short-term loans from foreign branches of Indian banks to pay to its suppliers of raw material (rough stones).
Even PNB and other lenders are slugging out over the loan term, which should not have been extended beyond 90 days, says PNB.
PNB has told police that it has also uncovered additional exposure of about Rs. 9.42 billion in connection with a massive fraud, according to a court filing.
PNB last month said it had been defrauded of about Rs. 12,600 crore by two jewellery groups who raised credit from overseas banks based on fraudulent guarantees issued in collusion with rogue PNB staff.