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Mystery looms: Letter to BS on Punjab National Bank's Rs 114 bn scam

An LoU does not contain a financial commitment

Business Standard 

This refers to “Rs 114bn scam: Pay up dues to banks for claims against LoUs, RBI tells PNB” (February 16). PNB has issued Letter of Undertakings (LoUs) and not Letter of Credit or Letter of Guarantee. An LoU does not contain a financial commitment. It is at best a letter of comfort. An LoU does not create a contingent liability to the issuing bank (PNB).

It is therefore surprising how RBI can insist that PNB meet its commitments to other banks who extended buyers’ credit. If other banks relied upon LoUs for extending buyers’ credit, it is their fault. It is altogether a different issue if PNB honoured other banks claims arising from discounted bills.

It is a mystery how PNB honoured its commitments even as Nirav Modi’s companies did not enjoy fund-based and non-fund based facilities. Did PNB create unsecured overdraft for Modi’s companies to honour other banks discounted bills?

K V Rao Bengaluru

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First Published: Sun, February 18 2018. 22:37 IST