According to an RBI notification, the move will come into effect immediately.

PNB fraud fallout RBI scraps Letters of Undertaking systemImage source: Shivamsetu via Wikimedia Commons
news PNB Fraud Wednesday, March 14, 2018 - 11:48

The Reserve Bank of India (RBI) on Tuesday discontinued the system of issuing Letters of Undertaking (LoUs) by banks for availing trade credits for imports into India in the wake of the Rs 12,600 crore fraud on state-run Punjab National Bank (PNB) unveiled last month.

According to an RBI notification, the move will come into effect immediately. 

"It has been decided to discontinue the practice of issuance of LoUs/ LoCs (Letters of Comfort) for trade credits for imports into India by AD Category-I banks with immediate effect," the notification said. 

"Letters of credit and bank guarantees for trade credits may continue to be issued subject to compliance with the regulations."

LoUs are bank guarantees through which a bank allows customers to raise money from another Indian bank's foreign branch as short-term credit. 

The PNB scam by diamantaire Nirav Modi and his uncle Mehul Choksi involved using LoUs issued in favour of the accused by bank employees who misused their access to PNB's SWIFT -- the electronic messaging system used for overseas funds transfers. 

None of these 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.

The fraud, which was initially Rs 11,000 crore, has only been getting worse.

The Punjab National Bank (PNB) filed a fresh complaint to the CBI alleging it has uncovered additional exposure of about Rs 942.18 crore defraud by Gitanjali Group of companies in connection with a multi-crore fraud.

The PNB, the country's second-biggest state-run lender, filed a supplementary complaint to the Central Bureau of Investigation (CBI) on March 4 against Gitanjali Gems Ltd, Gill India Ltd, Nakshatra Brand Ltd and Asmi Jewellery India Ltd for the additional fraud amount. 

It said a total amount therefore allegedly defrauded by the accused till date is about Rs 7,080.86 crore during 2013-17, according to a document submitted in special CBI court in Mumbai on Tuesday. 

The court filing said that the Gitanjali group of companies controlled by jeweller Mehul Choksi allegedly defrauded PNB of Rs 4,8886.72 crore regarding which the CBI filed a case on February 15. 

Topic tags,
Become a TNM Member for just Rs 999!
You can also support us with a one-time payment.