Nirav Modi impact: RBI scraps letters of undertaking for import trade credits

Watchdog scraps PNB scam tool

Watchdog scraps PNB scam tool

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 United States dollars 2 billion (Rs 12,636 crore) from PNB in connivance with bank officials.

Companies linked to Modi and his uncle Mehul Choksi defrauded PNB to the tune of Rs 13,600 crore.

Both Modi and Choksi have denied wrongdoing, and so have two key accused PNB employees in the case that has been dubbed as India's largest ever bank fraud. The new disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs.

RBI also barred lenders from issuing letters of comfort (LoC) as trade credit for importing goods into India with immediate effect.

As a trade financing measure, overseas banks usually lend to importers based on the LoUs issued by the importers' bank. They did not have any pre-approved credit limit either.


However, letters of credit and bank guarantees for trade credit will continue upon meeting certain conditions, the central bank said. "A LoU does not have these details and when it is not linked to the banking system it can not be traced, like it happened with PNB".

Though the latest decision would cause disruption in trade finance for importers who have been relying on these instruments, experts said that the move would help bring such trade transactions under a more legal and structured route. The change in regulations may hit import dependent businesses.

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.

LoUs and LoCs are used widely in several industries including gems and jewellery, oil and gas, electronic goods, solar panels and metals. "CBI said this in an application for incorporating Section 409 of the IPC in the second FIR pertaining to Choksi controlled firms".

Last month, Nirav Modi commented saying, that PNB had closed all doors of recovering dues for his brand by going public.

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