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Lou: RBI scraps bank LoUs in the aftermath of PNB fraud

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NEW DELHI: In what seems like a direct fallout of the multi-crore PNB scam involving jewellers Nirav Modi and Mehul Choksi, the Reserve Bank of India (RBI) on Tuesday discontinued issuance of Letter of Understanding (LoUs) by banks for trade credits for imports into India. The move will come into effect immediately, the central bank said in a statement.

To recap, some PNB employee fraudulently, in connivance with the accused Modi and Choksi, sent LoU messages to aid their companies.

LoUs are bank guarantees under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank.

The central bank’s move may hit businesses which are dependent on imports, who are often reliant on LoUs to get bank guarantees.

Updated: March 13, 2018 — 12:32 pm

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