PNB effect: RBI ends LoUs, LoCs with immediate effect

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The Reserve Bank of India has discontinued Letters of Undertaking (LoUs) or guarantees for overseas credit after the Punjab National Bank (PNB) fraud.

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The central bank's decision came after it was alleged that diamond czar Nirav Modi obtained fake LoUs to pull-off the fraud by colluding with a former bank employee.

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 banks with immediate effect," the central bank said in a notification.

The RBI notification further said that Letters of Credit and Bank Guarantees for trade credits for imports into India may continue to be issued subject to compliance with the provisions.

Last month, Punjab National Bank reported 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 the RBI through its fraud monitoring reporting system.

A multi-agency probe, including by CBI and ED has been launched into the PNB fraud.

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