March 23, 2018

PNB fraud fallout: RBI scraps Letters of Undertaking system

14 March 2018, 10:46 | Melvin Schneider

The logo of Punjab National Bank is seen on a branch office window in New Delhi India

Punjab National Bank Says Will Honour Banks' Claims But With Conditions

With this, the total amount of fraud stands to Rs 13,910.02 crore.

In a court filing on Tuesday, police said the Gitanjali group of companies controlled by jeweller Mehul Choksi allegedly defrauded PNB of Rs 70.8 billion ($1.09 billion).

Punjab National Bank told police on Tuesday that it had uncovered additional exposure of about 9.42 billion rupees ($144.83 mln) to Gitanjali group of companies, taking its overall exposure in connection with the fraud to well over the $2-billion mark.

"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 AD Category -I banks with immediate effect", RBI said in a notification on Tuesday.

The difference between these products is that LoUs and LoCs were issued by domestic banks at the behest of the importer.

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"Though this decision will hit Indian importers and jewellery businesses in the short term, it will definitely help bring down the possibility of bank fraud in the long term", a senior official said Wednesday. Bankers say the scrapping of LoU/LoC is unlikely to impact trade credit as banks can issue Letters of Credit (LC) and Bank Guarantees for trade credits for imports.

State Bank of India and three other state-run banks, Union Bank of India, UCO Bank and Allahabad Bank, are among lenders who have extended credit based on the LoUs issued by PNB that were later found to be fraudulent. They did not have any pre-approved credit limit either.

Though Modi has not yet been arrested, India's External Affairs Ministry has revoked his passport as well as Choksi's for their involvement in the scam.

The Reserve Bank of India also banned with immediate effect issuance of letters of comfort which, like LoUs, are used by importers to fund their overseas purchases. The investigating agency further submitted that there is a shortage of officers of the rank of inspectors and above in the CBI Bank Securities and Fraud Cell. According to the CBI statement, the investigation in the case is suffering from manpower crunch.

Last month, Nirav Modi commented saying, that PNB had closed all doors of recovering dues for his brand by going public.

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