New Delhi, March 13: In wake of the recent Nirav Modi-PNB Scam that shook India's banking sector, the Reserve Bank of India (RBI) on Tuesday ordered commercial banks to stop issuing guarantees in the form of Letters of undertaking (LoU). 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.

“On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/LoCs for trade credits for imports into India by AD Category–I banks with immediate effect,” the central bank said in a notification. The issuance of LoUs as a guarantee for credit has come under fire since the instrument was misused in the biggest bank fraud in recent history.

The recent move by the RBI comes after the LoUs were used allegedly by jewellers Nirav Modi and his uncle Mehul Choksi to perpetrate the $2 billion PNB fraud in connivance with officials of Punjab National Bank. Reports state that in the Nirav Modi-Mehul Choksi PNB fraud case, the loan term was allegedly extended far beyond what was prescribed in the rule book.

The RBI also barred the issuance of letters of comfort but said letters of credit and bank guarantees can be continued to be issued if certain rules are met.

To recall, Punjab National Bank (PNB), the second-biggest state-run lender discovered fraudulent issuance of LoUs/ Foreign Letters of Credit for payment of import bills and fraudulent transactions in accounts, amounting to Rs 12,967.86 crore, to RBI through its fraud monitoring reporting system. However, a multi-agency probe, including by CBI and ED has been launched into the PNB fraud.

(The above story first appeared on LatestLY on Mar 13, 2018 07:57 PM IST. For more news and updates on politics, world, sports, entertainment and lifestyle, log on to our website latestly.com).