RBI discontinues LOUs/LOCs issuance for trade credit for imports

RBI discontinues LOUs/LOCs issuance for trade credit for imports

The RBI said the decision to discontinue the practice of LoUs and Letters of Comfort (LoCs) for trade finance comes into force with immediate effect.

The issue of LoU for import of pearls in large quantity in the PNB case was rather unusual.

In the backdrop of Punjab National Bank (PNB) scam that is being blamed on two jewellers Nirav Modi and Mehul Choksi, the Reserve Bank of India (RBI) on Tuesday, made a decision to discontinue the Letter of Undertaking (LOU)/ Letter of Credit (LOCs) for trade credits for imports with immediate effect.

"Reserve Bank of India (RBI) has apprised that it had issued two circulars to banks in the months of August and November 2016, related to security and operational controls in the SWIFT environment", minister of state for finance Shiv Pratap Shukla told the Rajya Sabha in a written reply. This is with response to a Hindustan Times Report mentioning that Nirav Modi in an email had offered jewelry worth Rs. 2,000 crore, current account deposits of Rs 200 crore and immovable properties of Rs 50 crore to settle part of his liabilities.

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However, letters of credit and bank guarantees will continue upon meeting certain conditions, the central bank said in a press statement.

The PNB scam by diamantaire Nirav Modi and his uncle Mehul Choksi involved using LoUs issued in favour of the accused by bank employees who misused their access to PNB's SWIFT - the electronic messaging system used for overseas funds transfers. They did not have any pre-approved credit limit either.

The Bank has reported a Gross Non Performing Assets (Gross NPAs) of Rs 57519.41 Crore (12.11 % of total assets) and Net Non Performing Assets (Net NPAs) of Rs 34075.65 Crore (7.55% of total assets). These firms raised short-term credit from overseas branches of other Indian banks based on these LoUs. The change in regulations may hit import dependent businesses.

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