In a major decision that could hamper business prospects of several banks, the Reserve Bank of India (RBI) on Tuesday banned banks from issuing Letters of Undertaking (LoUs) on trade credits for imports. The LoUs and Letters of Credits (LoCs) were allegedly misused by diamond merchant Nirav Modi and his uncle Mehul Choksi to defraud state-owned Punjab National Bank of Rs 12,700 crore in connivance of inside bank officials. The RBI's decision will be applicable with immediate effect.
"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," a statement from the RBI said.
Letters of Credit and bank guarantees for trade credits for imports into India will continue to be issued subject to compliance with the RBI provisions, added the statement.
Punjab National Bank had reported fraudulent issuances of Letters of Undertakings (LoUs) and Letters of Credit (LoCs) for the 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.
The Enforcement Directorate and the Central Bureau of Investigation (CBI) are already investigating the case, and have seized several assets related to both Nirav Modi and Mehul Choksi's companies.
As of now, under the RBI's policy on trade credits for imports, authorised dealer (AD) banks were allowed to issue guarantees - LoUs or LoCs - in favour of overseas supplier, bank, and financial institution, up to $20 million per transaction for a year. The guaranties are given for import of all non-capital goods permissible under the Foreign Trade Policy (except gold), and up to three years for import of capital goods.
More exposure in PNB fraud
Meanwhile, PNB has again come up with an additional exposure of about Rs 942 crore in the country's biggest bank fraud case. According to a court filing seen by Reuters, the police also told the court that Mehul Choksi's companies controlled by billionaire Nirav Modi defrauded the lender of Rs 708 crore. The current exposure takes the overall amount in the Nirav Modi scam to around Rs 13,400 crore.
PNB takes steps to secure Swift operations
Fraud-hit Punjab National Bank (PNB) has taken a series of measures to check misuse of Swift message platform, allegedly used by Nirav Modi and his associates to defraud the bank of Rs 1,2967.86 crore, the Finance Ministry said on Tuesday.
State-owned PNB has reported fraudulent issuance of LoUs/ Foreign Letters of Credit (FLCs) for payments of import bills, amounting to Rs 12,967.86 crore, to the RBI, Minister of State for Finance Shiv Pratap Shukla said in a written reply to the Rajya Sabha.
He said as per inputs from PNB, messages were sent via Swift system to overseas branches of Indian banks, regarding fraudulently issued LoUs/FLCs without entering the transactions in the bank's Core Banking System (CBS). He added that PNB has appraised that it has taken several steps to ensure that such unauthorised activities are not repeated.
Listing out the steps taken by PNB, Shukla said the bank has established an additional tier (off-site) as a third level of re-authorisation of Swift messages, wherein payment messages are re-authorised by a separate team of Swift centre, Mumbai only.
"Switching off of Swift server (LTE) by 10 pm, and restricting Swift operations at branches to 6.30 pm and centralised back office for trade finance by 7 pm", is another step taken by PNB.
With PTI inputs