RBI bans all Indian banks from issuing LoUs, LoCs

PNB fraud Nirav Modi allegedly managed to get 1,212 LoUs- which the RBI has discontinued now- in 74 months

The apex bank in its notification said,"It has been made a decision to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category -I banks with immediate effect". 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.

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.

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.


The RBI decision could potentially push up the cost of imports by up to half a percentage point, besides putting foreign banks on an even keel with Indian banks in financing imports, bankers said. "This is clearly a risk mitigating step as letter of credit are governed by Uniform Customs and Practice for Documentary Credits, which has a well defined set of rules and procedures", said a senior official at one of the public sector banks. They did not have any pre-approved credit limit either. "In the case of LCs for import of goods, banks should be very vigilant while making payment to the overseas suppliers on the basis of shipping documents".

The Finance Minister Arun Jaitley, on Tuesday, in a written reply to the Rajya Sabha revealed 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, reported in PTI.

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