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RBI Limits issuance of Letter of Undertaking After Nirav Modi Incident

The RBI issued a circular asking the banks on Tuesday to stop issuing LOUs and Letter of Comforts which acts as an assurance for payments extended by a third party, for imports into India with immediate effect. The circular also mentioned that Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued.
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The Reserve Bank of India scrapped the system of Letter of Undertakings (LOUs) to allow the customer of a bank to withdraw foreign currency from an Indian Bank in other nation. After the massive INR 11000 crore fraud at Punjab National Bank by Nirav Modi and Mehul Choksi, the loopholes came up and brought the matter under scrutiny.

The RBI issued a circular asking the banks on Tuesday to stop issuing LOUs and Letter of Comforts which acts as an assurance for payments extended by a third party, for imports into India with immediate effect. The circular also mentioned that Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued. 

As per the investigation, three companies owned by Nirav Modi with the connivance of the Bank Officials got LOUs issued was totally in violation of rules. LOUs are issued only after a bank ensures that the customer has sufficient funds or assets to recover the amount of foreign exchange withdrawn abroad, and it comes with a credit limit and a charge is levied for the service. But, in the concerned case of Nirav Modi, neither the companies had enough funds to cover the debts, not the banks were paid with any service charge. 

The matter drew attention when one of the firms of Nirav Modi applied for more LOUs which got refused. The bank officials stated that the firm needs to show 100% collateral, which the firm objected saying that they have not done so in previous events. That was the time when investigation got initiated and while scanning the records it came up that there is no trace of the said transactions.

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Reviewed by:
Rashmita Das
Published on 14-Mar-2018
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