PNB fraud: Public sector bank issued over 41,000 LoUs since 2011

It appears that the fugitive jeweller Nirav Modi and his uncle Mehul Choksi weren't the only ones who got LoUs from fraud-hit Punjab National Bank. State-run PNB had issued a total 41,178 Letters of Undertaking (LoUs) since 2011. Out of these, as many as 1,590 were given to Nirav Modi, Mehul Choksi and their associates, the finance ministry has said.

In the aftermath of PNB scam, the Reserve Bank of India (RBI) had decided to discontinue the practice of issuance of LoUs/ LoCs (letters of comfort) for trade credits. Both these instruments were a form of credit guarantee, often used by importers to fund their overseas purchases.

In a written reply to the House on March 20, Finance Minister Arun Jaitley said that PNB has apprised that 7,672 LoUs were issued with validity of 90 days, 20,078 LoUs were issued with validity of 180 days, 11,224 LoUs were issued with validity of 365 days, and 2,204 LoUs were issued with validity of more than 365 days.

Minister of State for Finance Shiv Pratap Shukla said that as per PNB, the total number of LoUs issued to the companies of Nirav Modi, his relatives and the Nirav Modi Group are 1,213, and to Mehul Choksi, his relatives and the Gitanjali Group are 377.

However, PNB has said that the details regarding money withdrawn from the foreign branch of the other banks against each LoU is presently not available as the matter is 'under investigation'.

Jaitley also said the Reserve Bank of India (RBI) has informed that it does not have "complete/granular" details of LoUs issued by PNB since 2011 till May 2014 and thereafter. Prime Minister Narendra Modi-led government had assumed office in May 2014.

After the PNB scam was unearthed, the regulator had also asked all banks to provide it with details of the letters of undertaking (LoUs) issued by them to business entities in recent years. However, the RBI statement added that banks may continue to issue letters of credit (LCs) and bank guarantees for trade financing, subject to compliance with RBI guidelines.

Bank Guarantees and LCs are considered less risky because receiving banks have to conduct their own credit appraisal on companies before accepting them. "LCs are more secure because they have details of the purchase by the importer, the date of issue, expiry date, the material purchase and other transaction details," explained an executive at a state-run lender. In the case of the now-banned LoUs and LoCs, the receiving banks were entirely dependent on the bank issuing them at the behest of the importers.

The PNB officials - who fraudulently issued the LoUs - had bypassed the CBS (Core Banking Solutions) system and used the international messaging service SWIFT which was not integrated with CBS.