After PNB scam, RBI discontinues LoUs and LoCs for trade credits

After PNB scam, RBI discontinues LoUs and LoCs for trade credits

Mumbai: In a major decision, the RBI on Tuesday banned banks from issuing Letters of Undertaking (LoUs) - instruments used allegedly by diamantaire Nirav Modi and his uncle Mehul Choksi to defraud state-owned PNB of almost Rs 13,000 crore in conniva-nce of bank officials. The RBI's decision will be applicable with immediate effect.

The alleged fraud at state-owned Punjab National Bank (PNB), involving diamond traders Nirav Modi and Mehul Choksi, has taken a new twist as the amount rose to Rs 12,700 crore from previous Rs 11,400 crore, putting the health of gems and jewellery sector's growth at stake. "Letters of Credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with (certain) provisions".

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 Punjab National Bank (PNB) will honour claims by peer banks who issued credit to billionaire jeweller Nirav Modi and his uncle Mehul Choksi against guarantees given by PNB, but the payments come with riders. The guaranties are given for import of all non-capital goods permissible under the Foreign Trade Policy (except gold), and up to three years for import of capital goods.

Punjab National Bank has told police that it has uncovered additional exposure of about Rs 9.42 billion ($145.2 million) in connection with a massive alleged fraud, according to a court filing on Tuesday seen by Reuters. By giving LoU, PNB agrees to repay the principal amount and interest on the clients (Nirav Modi) loan unconditionally.

As a trade financing measure, overseas banks usually lend to importers based on the LoUs issued by the importers' bank. 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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