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, chose to discontinue the Letter of Undertaking (LOU)/ Letter of Credit (LOCs) for trade credits for imports with immediate effect.
"On a review of the extant guidelines, it has been chose to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category -I banks with immediate effect", a statement from the RBI said.
The bank has also filed criminal complaints with CBI and the ED, both of which launched nationwide searches on dozens of offices and residences of the alleged fraudsters.The bank has named Modi's brother, his American wife Ami, and uncle Choksi besides some others in the FIR.
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The Punjab National Bank (PNB) will honour claims by peer banks who issued credit to billionaire jeweller Nirav Modi and his uncle Mehul Choksi against guarantees given by PNB, but the payments come with riders.
However, the RBI has allowed banks to issue letters of credit and bank guarantee for trade credits for imports into India subject to complia-nce with the provisions. The guaranties are given for import of all non-capital goods permissible under the Foreign Trade Policy (except gold), and up to three years for import of capital goods.
It all started on February 14, when Punjab National Bank (PNB) revealed that it was cheated by two big diamond jewelers namely Nirav Modi and Gitanjali Gem's Mehul Choksi with the connivance of some officials. The current exposure takes the overall amount in the Nirav Modi scam to around Rs 13,400 crore.
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Companies belonging to Modi and Choksi allegedly colluded with employees of Punjab National Bank's Brady House branch in Mumbai to obtain fraudulent LoUs, without providing any margin money as security.
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.
None of these fraudulent transactions were registered on the bank's internal transaction messaging system, the Core Banking Solution (CBS), enabling the fraud to go undetected for long.
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