Nirav Modi Effect: RBI Stops Letters of Undertaking For Overseas Credit

The Reserve Bank of India has discontinued letters of undertaking (LoUs) or guarantees for overseas credit after the Rs 12,600 crore Punjab National Bank (PNB) fraud was unearthed last month. LoU credit is ideally meant only for the short-term. It also serves the purpose of a bank guarantee for a bank’s customer for making payment to offshore suppliers in foreign currency.

In the Nirav Modi-Mehul Choksi case, the loan term was allegedly extended far beyond what was prescribed in the rule book.

The RBI said its decision to scrap the practice of issuing LoUs is effective immediately. “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.

Nirav Modi and the firms he controls allegedly leveraged the loopholes in the banking system by seeking LoUs and raising credit from foreign banks to pay their merchants.

nirav modi

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

For the past seven years, Nirav Modi and his three firms – Diamond R Us, Solar Exports and Stellar Diamonds – had been allegedly taking LoUs from PNB’s Brady Road branch in Mumbai.

These bank guarantees allegedly helped Mr Modi raise short-term loans from foreign branches of Indian banks to pay to suppliers of raw material such as rough stones.

Even PNB and other lenders are slugging out over the loan term, which should not have been extended beyond 90 days, says PNB.

PNB has told police that it has also uncovered additional exposure of about Rs 9.42 billion in connection with a massive fraud, according to a court filing.

PNB last month said it had been defrauded of about Rs 12,600 crore by two jewellery groups who raised credit from overseas banks based on fraudulent guarantees issued in collusion with rogue PNB staff.

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