RBI Stops Letters of Undertaking For Overseas Credit After PNB Fraud

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.

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