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Taking lessons from PNB-Neerav Modi scam, RBI discontinues LoUs, LoCs for Trade Credits

3/14/2018

New Delhi, In a major decision to rein in the scam like PNB-Neerav Modi, Reserve Bank of India (RBI) on Tuesday asked the banks not to issue Letters of Undertaking (LoUs). LoUs were the instruments used allegedly by diamantaire Nirav Modi and his uncle Mehul Choksi to defraud state-owned PNB of nearly Rs 12,499 crores in connivance of bank officials. RBI notification said, “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. “Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time,” said the RBI. It added that Punjab National Bank reported fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs 129.67 billion, to the RBI through its fraud monitoring reporting system. A multi-agency probe, including by CBI and ED has been launched into the PNB fraud. 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.

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