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In a major decision, RBI today banned banks from issuing Letters of Undertaking (LoUs) -- instruments used allegedly by diamantaire Nirav Modi and his uncle Mehul Choksi to defraud state-owned PNB of Rs nearly 130 billion in connivance of bank officials.
"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.
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 129.67 billion, 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.
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.