Sunday, 21 October, 2018


PNB effect: RBI ends LoUs, LoCs with immediate effect

Post PNB fraud case RBI stops use of LoUs for trade credit for imports PNB effect: RBI ends LoUs, LoCs with immediate effect
Conrad Doyle | 14 March, 2018, 04:46

Meanwhile, PNB has again come up with an additional exposure of about Rs 942 crore in the country's biggest bank fraud case.

The CBI has alleged that firms controlled by diamond traders Nirav Modi and his uncle Choksi obtained fraudulent LoUs and letters of credit (LCs) worth United States dollars 2 billion (Rs 12,636 crore) from PNB in connivance with bank officials.

"On a review of the extant guidelines, it has been chose to discontinue the practice of issuance of LoUs/LoCs for trade credits for imports into India by authorised dealer (AD) Category-I banks with immediate effect", the central bank said in a notification.

The Parliamentary Standing Committee on Finance, headed by Congress member M Veerappa Moily, in a report, had said that "international branches of many Indian banks including State Bank of India, Union Bank of India, Allahabad Bank, Axis Bank and some foreign banks, lent money to a particular entity or many entities or companies based on these alleged fraudulent guarantees".

The Reserve Bank of India also barred the issuance of letters of comfort, but said letters of credit and bank guarantees can be continued to be issued if certain rules are met.

The RBI issued the directive on LoUs and LoCs on Tuesday, about a month after it was discovered that diamond merchants Nirav Modi and Mehul Choksi had misused LoUs issued by PNB to defraud the bank of over $2 billion.

The RBI has already started a special audit of public sector banks wherein it will closely scrutinise their trade financing activities especially with regards to the issuances of LoUs. They did not have any pre-approved credit limit either. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs.

The Bank has reported a Gross Non Performing Assets (Gross NPAs) of Rs 57519.41 Crore (12.11 % of total assets) and Net Non Performing Assets (Net NPAs) of Rs 34075.65 Crore (7.55% of total assets).

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