PNB fraud fallout: RBI's ban on LoUs to hit import dependent businesses
The RBI on Tuesday barred banks from issuing guarantees in the form of letters of undertaking (LoU) to prevent any further misuse of the facility as was done by rogue jewellers Nirav Modi and his uncle Mehul Choksi in the massive PNB fraud.
The magnitude of the PNB fraud has also gone up further with papers presented in court on Tuesday showing the public sector lender had lost an additional Rs 942 crore to companies owned by Mehula Choksi, according to a Reuters report.
The total amount that has been swindled in the country's biggest banking scam ever has now gone up to a humungous Rs 13,578 crore. In a court filing on Tuesday, police said the Gitanjali group of companies controlled by jeweller Mehul Choksi allegedly defrauded PNB of Rs 7,080 crore.
PNB had previously pegged its exposure to the Gitanjali companies at Rs 6,138 crore. The new disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark. A lawyer for Gitanjali group's head, Mehul Choksi, said he was unaware of the new allegations and declined to comment, the Reuters report said. The two fugitive jewellers had raised credit from overseas banks based on fraudulent guarantees issued in collusion with PNB staff. The RBI has decided not take any chances with this provision and cracked down to plug the route.
Reserve Bank of India also banned with immediate effect issuance of letters of comfort which, like LoUs, are used by importers to fund their overseas purchases. However, letters of credit and bank guarantees will continue upon meeting certain conditions, the central bank said in a press statement. Companies belonging to Modi and Choksi allegedly colluded with employees of Punjab National Bank's Brady House
branch in Mumbai to obtain fraudulent LoUs, without providing any margin money as security. They did not have any pre-approved credit limit either. These firms raised short-term credit from overseas branches of other Indian banks based on these LoUs. 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 commercial banks with immediate effect, RBI said.
Letters of Credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with (certain) provisions. As a trade financing measure, overseas banks usually lend to importers based on the LoUs issued by the importers' bank. The money thus raised is used to make payment to offshore suppliers in for-eign currency. The change in regulations may hit import dependent businesses and trade that are often reliant on LoUs to get bank guarantees. Earlier in the day, Finance Minister Arun Jaitley in a written reply to a question in Rajya Sabha said that Nirav Modi obtained his first fraudulent guarantee from PNB's Brady House branch in Mumbai on March 10, 2011 and managed to get 1,212 more such guarantees over the next 74 months.
PNB says junior employees at the branch issued LoUs over the SWIFT interbank messaging system without entering any of these transactions on the bank's own system. Such transactions went on for six years without detection. Solar Exports, Stellar Diamonds and Diamond R US belonging to high-end jeweller Modi and Choksi-promoted Gitanjali Gems, Gili India and Nakshatra are alleged to have been involved in the scam. CBI and ED are leading a multi agency probe into the fraud.
Both Modi and Choksi are abroad and have refused to return to face trial. Ajay Sahai, Director General of exporters' body Fieo said that the RBI decision should have very little impact on trade as bank guarantee and letter of credit continue to be available.
According to him, LoUs were generally used by large players in gems and jewellery sector. Other public sector banks, too, have approached the CBI as in the Rotomac Group and Simbhaoli Sugars cases in which loans have not been returned. Jolted by the PNB fraud and other bank scams surfacing in recent days, the Finance Ministry on Tuesday directed public sector banks to investigate all bad loan accounts exceeding Rs 50 crore for possible fraud and in case of any adverse findings report the cases immediately to the CBI.