In what has been dubbed the biggest fraud in the country's banking history, Punjab National Bank, the country's second-biggest state-run bank, said last month it had been defrauded of about $2 billion.
The bank has accused two jewellery groups - one controlled by diamond tycoon Nirav Modi and the other by his uncle, Mehul Choksi - of colluding with rogue bank employees to secure credit from overseas branches of Indian banks using fraudulently issued guarantees largely in the form of letters of undertaking.
Both Mr Modi and Mr Choksi have denied any wrongdoing. Police say they left India in January, before the initial complaint was filed, and their whereabouts are unknown.
In a notice posted on its website, the RBI said banks would have to stop issuing letters of undertaking and letters of comfort, with immediate effect. It said banks could continue issuing credit guarantees in the forms of letters of credits and bank guarantees, however, if certain parameters were met.
The instruments are all forms of trade finance often used by importers to fund their overseas purchases.
Bankers said letters of credit involved more paperwork and the due diligence was more stringent than letters of undertaking. Officials with direct knowledge also said letters of credit have more international acceptability, while letters of undertaking were mostly used between Indian banks.
In a court filing on Tuesday, police said PNB had filed a new complaint alleging it had been defrauded of an additional Rs 942 crore ($145 million) by the Gitanjali group of jewellery companies, taking the total amount allegedly defrauded by Mr Choksi's group to Rs 7,080 crore ($1.09 billion).
Tuesday's disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark.
PNB said the additional amount did not involve any fraudulent letters of undertaking, but was sanctioned credit to Gitanjali group that it was recalling and adding to the total amount defrauded.
A lawyer for Mr Choksi said he was unaware of the new allegations and declined to comment.
Law enforcement agencies had previously attributed Rs 6,138 crore of the alleged fraud amount to Gitanjali, and nearly Rs 6,500 crore to companies controlled by Mr Modi.
PNB has also alleged Mr Modi's companies cheated the bank of a further Rs 322 crore, which it said was not used for the purposes for which the loans were given.
Who foots the bill?
The alleged fraud has shaken the country's banking sector, leading to a government and central bank crackdown on lenders' systems and practices.
Finance Minister Arun Jaitley told Parliament on Tuesday a total 1,213 fraudulent letters of undertaking were issued to Nirav Modi's companies between March 2011 and May 2017.
Banks also continue to debate who should assume liabilities from the fraud, with several lenders that have either lent to the jewellery groups based on the fraudulent PNB guarantees, or bought the so-called letters of undertaking from the secondary market, wanting PNB to compensate them.
PNB has said it will honour only "bona fide" commitments, arguing other banks that lent to the jeweller groups shared in the blame by not carrying out adequate checks.
The Economic Times daily, citing unnamed sources, reported earlier on Tuesday that PNB would honour claims by peer banks that issued credit to the jewellers, but with a few caveats.
Banking sources, however, said such an agreement was not yet a done deal.
"We are talking. But then we have not come to a conclusion," said a senior banker, who did not want to be named, adding that PNB had not yet provided concrete assurances of repayment.
Another said that, although they were hopeful of arriving at an "amicable solution" on who takes the liability, but added it would likely need intervention by India's central bank and the government.
Banks would need to make provisions for any potential losses from fraud when they report results for the March quarter, said the banker.
State bank shares rose on Tuesday after an easing in retail inflation allayed fears of a central bank interest rate increase in the near term, with the sector index gaining 2.3 per cent.
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