Nirav Modi fraud: RBI discontinues issuance of LoUs

Mumbai: Reserve Bank of India (RBI) has decided with immediate effect to discontinue the practice of issuance of letter of undertaking (LoUs)/ letter of credit (LoCs) for trade credits for imports into India by authorized dealer (AD Category –I) banks.

This follows the Rs12,600 crore Punjab National Bank (PNB) scam where Nirav Modi-Mehul Choksi duo used LoUs to defraud the bank for years together.  The modus operandi involved accessing credits in foreign currency from foreign banks using the letter of undertaking  (LoUs) issued by Punjab National Bank’s Brady branch in Mumbai and insidiously taking the credit to huge amounts before fleeing country without leaving any security.

“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,” an RBI notification issued today said.

RBI added that the 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 No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.

The fraud, which is considered to be one of the largest in India’s banking history, was perpetrated with the connivance of certain bank staff by using the loopholes in the issuance of LoUs.

Though LoUs are issued by Indian banks for raising short term credit by Indian business groups to fund imports to India, Nirav Modi and his group companies rolled over the facility and at the same time increasing the amounts to huge figures. By the time the fraud was detected, the perpetrators had left the country leaving the bank high and dry. The investigations into the fraud are on and several of the PNB staff has been arrested for questioning.


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