After PNB Scam, RBI Bans All Indian Banks From Issuing LoUs, LoCs

| March 14 , 2018 , 10:58 IST

Nearly a month after the Rs 12,700 crore fraud hit India's second largest public sector bank, the Punjab National Bank, the Reserve Bank of India on Tuesday announced that the use of Letters of Undertaking (LoUs) and Letters of Comfort(LoCs) are to be banned with immediate effect.

LoUs and LoCs are issued by Indian banks to domestic importers to get foreign exchange from international banks at cheaper rates. The LoU acts as a form of guarantee between 2 banks, allowing the issuer bank's customer to get foreign exchange from another bank in the form of short-term credit.

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Jeweller businessmen Nirav Modi and Mehul Choksi used LoUs issued fraudulently by the Punjab National Bank to scam it of more than $2 billion. Since the bank went public with the details of the fraud, the Central Bureau of Investigation, as well as the Enforcement Directorate, have been working to seize the assets of Modi and Choksi, both of them having left the nation 1 month before the scam was revealed.

According to bankers, the decision of the RBI could lead to an increase in the cost of imports by up to half a percentage point, apart from putting foreign banks on an even keel with Indian banks in financing imports.

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“This regulation will certainly help global banks that were earlier outpriced by Indian banks, to get back to financing genuine trade finance transactions of Indian corporates and support Indian imports, though withholding tax would add to the cost of the importers,” said Joiel Akilan, ED & chief representative-India of one of Europe’s leading banks, BBVA.

Although the RBI directive is effective immediately, “letters of credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with” existing regulations, an RBI notification said.