India cenbank bars issuance of letters of undertaking for trade credit

India cenbank bars issuance of letters of undertaking for trade credit

As PNB bank credit fraud of Nirav Modi swelled to huge proportions RBI has put a ceiling on bank credits - barred all lenders from issuing letters of the undertaking - a form of credit guarantee at the heart of a major fraud of PNB.

This was pertaining to over Rs 6,200 crore of alleged fraudulent letters of undertaking (LoUs) and Letters of credit (LCs) issued to Modi's companies by PNB.

The PNB on Tuesday agreed that it would honour claims by peer banks who issued credit to Modi and Choksi against guarantees given by PNB, but added that the payments would come with riders.

On February 22, the PNB gave an additional complaint whereby the fraud in respect of Foreign Letter of Credits increased by another Rs 1,251.56 crore.

The total amount that has been swindled in the country's biggest banking scam ever has now gone up to a humungous Rs 13,578 crore. A lawyer for Gitanjali group's head, Mehul Choksi, said he was unaware of the new allegations and declined to comment, the Reuters report said.

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While LOUs allow the customer of a bank to withdraw foreign currency from an Indian bank overseas, LOC is an assurance for payment extended by a third party for imports into India.

Law enforcement agencies had previously attributed 61.38 billion rupees of the alleged fraud amount to Gitanjali, and almost 65 billion rupees to companies controlled by Modi. It also provided the LoU-issuing bank with a source of fee income.

"There are fraudulent transaction between these companies and firms namely Solar exports, Stellar diamond and Diamond R U.S. and vice versa during the period between 2013 to 2017, in as much as credit limit sanctioned have not been used which these were sanctioned", Nepalia said in the complaint".

The RBI said the decision to discontinue the practice of LoUs and Letters of Comfort (LoCs) for trade finance comes into force with immediate effect.

The Punjab National Bank (PNB) has filed a fresh complaint to the CBI alleging it has uncovered additional exposure of about Rs 942.18 crore defraud by Gitanjali Group of companies in connection with a multi-crore fraud. This is with response to a Hindustan Times Report mentioning that Nirav Modi in an email had offered jewelry worth Rs. 2,000 crore, current account deposits of Rs 200 crore and immovable properties of Rs 50 crore to settle part of his liabilities.

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