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profishingrods.com June 25, 2018


India's central bank scraps guarantee system in wake of bank fraud

14 March 2018, 10:44 | Joann Bryant

The Reserve Bank of India headquarters in Fort Mumbai

The Reserve Bank of India headquarters in Fort Mumbai

The Reserve Bank of India (RBI) on Tuesday discontinued the system of issuing Letters of Undertaking (LoUs) by banks for availing trade credits for imports into India in the wake of the Rs 12,600 crore fraud on state-run Punjab National Bank (PNB) unveiled last month. But these LoUs were rolled over beyond the expiry date and used to leverage one of the biggest frauds in Indian banking history.

LoUs were allegedly used by diamantaires Nirav Modi and his uncle Mehul Choksi to defraud the state-owned bank in connivance with its officials.

The fair market value of the iconic Rhythm House, acquired by Modi's firm Firestar Diamond International Pvt Ltd in March 2017, is pegged at Rs 32 crore, the same price at which Modi acquired it a year ago from Mehmood Curmally. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs. Bankers say the scrapping of LoU/LoC is unlikely to impact trade credit as banks can issue Letters of Credit (LC) and Bank Guarantees for trade credits for imports. They did not have any pre-approved credit limit either.

The Economic Times daily, citing unnamed sources, reported earlier on Tuesday that PNB would honour claims by peer banks that issued credit to the jewellers, but with a few caveats.

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.




A multi-agency probe, including by the Central Bureau of Investigation and the Enforcement Directorate, has been launched into the PNB fraud.

Though the latest decision would cause disruption in trade finance for importers who have been relying on these instruments, experts said that the move would help bring such trade transactions under a more legal and structured route.

LoUs and LoCs are used widely in several industries including gems and jewellery, oil and gas, electronic goods, solar panels and metals. Other public sector banks, too, have approached the CBI as in the Rotomac Group and Simbhaoli Sugars cases in which loans have not been returned.

Punjab National did not immediately respond to requests for comment.



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