Wednesday, 20 June, 2018

Nirav Modi Effect: RBI Stops Letters of Undertaking For Overseas Credit

The PNB fraud has turned into a public sector versus private sector debate The PNB fraud has turned into a public sector versus private sector debate
Preston Stone | 14 March, 2018, 10:49

But these LoUs were rolled over beyond the expiry date and used to leverage one of the biggest frauds in Indian banking history.

In a court filing on Tuesday, the bank said the Gitanjali Group of Companies, controlled by jeweller Mehul Choksi, allegedly defrauded it of Rs 7,080 crore.

The CBI today told a Mumbai court that it has added the charge of "criminal breach of trust" to the case related to diamond trader Mehul Choksi's firms in the Punjab National Bank (PNB) fraud case.

The central bank's move is likely to lead to a freeze in trade financing activities in India, increasing costs for importers who have relied on these instruments to get cheaper overseas credit to pay suppliers.

In a notice posted on its website, the Reserve Bank of India said banks would have to stop issuing letters of undertaking and letters of comfort, with immediate effect.

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Lead has always been marked out as a toxic substance and has been phased out since the 1990s to reduce its environmental impact. They were not, however, able to factor out the possible impact of exposure to arsenic or air pollution.

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.

In the case of letters of credit and bank guarantees, domestic banks issue these in favour of the exporter, or seller's, bank. They did not have any pre-approved credit limit either. Earlier in the day, Finance Minister Arun Jaitley in a written reply to a question in Rajya Sabha said that Nirav Modi obtained his first fraudulent guarantee from PNB's Brady House branch in Mumbai on March 10, 2011 and managed to get 1,212 more such guarantees over the next 74 months. "A LoU does not have these details and when it is not linked to the banking system it can not be traced, like it happened with PNB".

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.

When Central government is looking upon Central Bureau of Investigation (CBI) for probe into the Punjab National Bank (PNB) fraud case, the agency headed by IPS officer Alok Kumar Verma expressed their limitation in expediting the investigation citing shortage of manpower.

Punjab National did not immediately respond to requests for comment.

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