RBI bars banks from issuing LoUs in Nirav scam fallout

Cornelia Mascio
Marzo 14, 2018

"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 BBVA, one of Europe's leading banks.

Also, AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers.

Shares of state-run banks rose on Tuesday after a report said Punjab National Bank (PNB) will compensate lenders who have lost money in an alleged fraud, and as easing inflation data allayed fears of a policy rate rise.

Punjab National Bank (PNB) reported fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs 12,967.86 crore, to the RBI through its fraud monitoring reporting system.

Among others, the agency has arrested Gokulnath Shetty, the then deputy manager (now retired) of PNB, in connection with issuance of fraudulent letters of undertaking (LoUs) to Choksi-owned firms. The current exposure takes the overall amount in the Nirav Modi scam to around Rs 13,400 crore. This led into verification guarantees on LoUs without taking necessary sanctions. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs.

The central bank has also mandated commercial banks to put in place adequate audit and compliance mechanisms with bank board-level reporting through the audit committee of the board, the minister added.

RBI in 2015 only observed that banks are extending non-fund based credit facilities like guarantees / stand-by letter of credits / letter of comforts etc. on behalf of JV / WOS / WoSDS for purposes which are not connected with their business, rather, in certain cases, these facilities are used to avail foreign currency loans for repayment of Rupee loans.

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