PNB effect: RBI ends LoUs, LoCs with immediate effect

PNB effect: RBI ends LoUs, LoCs with immediate effect

"Letters of Credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with (certain) provisions".

The RBI also banned with immediate effect issuance of letters of comfort which, like LoUs, are used by importers to fund their overseas purchases.

The RBI has taken other fraud-control measures like bringing out a framework for dealing with loan frauds above Rs 50 crore, creating an online Central Fraud Registry, issuing caution advice detailing names of fraudsters and their modus operandi and ordering banks to re-verify the title deeds for all credit exposures above Rs 5 crore.

LoU is sanctioned by one party, such as an independent contractor, describing the scope of work that's going to be provided.

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The Parliamentary Standing Committee on Finance, headed by Congress member M Veerappa Moily, in a report, had said that "international branches of many Indian banks including State Bank of India, Union Bank of India, Allahabad Bank, Axis Bank and some foreign banks, lent money to a particular entity or many entities or companies based on these alleged fraudulent guarantees".

In today's plea before the special CBI court, the agency said it has filed another supplementary complaint about additional fraud of Rs 942 crore, taking the total amount of fraud to Rs 7,080 crore.

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.

What happened in this case is that PNB officials allegedly used their access to SWIFT messaging system, which is used for overseas transaction. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs. Banks charge a fee from the importer for the LoU. The change in regulations may hit import dependent businesses.

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