Mumbai: The Reserve Bank of India has discontinued letters of undertaking (LoUs) or guarantees for overseas credit — the misuse of which gave rise to the Rs 12,600 crore Punjab National Bank (PNB) fraud.
Nirav Modi’s firms had connived with PNB staff to extract LoUs worth crores — well beyond their prescribed timeline — to raise credit from foreign banks. The money was later allegedly funnelled to shell companies set up by Modi and his uncle Mehul Choksi. Normally, LoUs are for short term — a fixed period of 90 days. But these LoUs were rolled over beyond the expiry date and used to leverage one of the biggest frauds in Indian banking history.
The RBI said the decision to discontinue the practice of issuing LoUs and Letters of Comfort (LoCs) for trade finance comes into force with immediate effect. The RBI notification further said that Letters of Credit and Bank Guarantees for trade credits for imports into India may continue to be issued subject to compliance with the provisions.