India cenbank bars issuance of letters of undertaking for trade credit

Mae Love
March 14, 2018

The CBI has alleged that firms controlled by diamond traders Nirav Modi and his uncle Choksi obtained fraudulent LoUs and letters of credit (LCs) worth Dollars 2 billion (Rs 12,636 crore) from PNB in connivance with bank officials.

The RBI notification further said that Letters of Credit and Bank Guarantees for trade credits for imports into India may continue to be issued subject to compliance with the provisions.

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. An LoU is a type of guarantee between two banks that allows the issuer bank's customer to get foreign exchange from another Indian bank's foreign branch in the form of short-term credit.

State Bank of India and three other state-run banks, Union Bank of India, UCO Bank and Allahabad Bank, are among lenders who have extended credit based on the LoUs issued by PNB that were later found to be fraudulent.

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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. This is with response to a Hindustan Times Report mentioning that Nirav Modi in an email had offered jewelry worth Rs. 2,000 crore, current account deposits of Rs 200 crore and immovable properties of Rs 50 crore to settle part of his liabilities.

Fraud-hit Punjab National Bank (PNB) has taken a series of measures to check misuse of Swift message platform, allegedly used by Nirav Modi and his associates to defraud the bank of Rs 1,2967.86 crore, the Finance Ministry said on Tuesday.

The RBI has already started a special audit of public sector banks wherein it will closely scrutinise their trade financing activities especially with regards to the issuances of LoUs. 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.

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