- Letter of undertaking (LoU) is ideally meant only for the short-term
- RBI said move to discontinue issuing LoUs effective immediately
- PNB last month said it had been defrauded of about Rs 12,600 crore
The Reserve Bank today asked banks to stop issuing LOUs and Letters of Comfort, which is as assurance for payment extended by a third party, for imports into India with immediate effect.
The circular that contained the directions also said, "Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued".
Investigators say three companies of Nirav Modi, with connivance of the officials of the Punjab National Bank, had got Letters of Undertaking issued in complete violation of rules.
LoUs are essentially issued after a bank ensures the customer has sufficient funds or assets to cover the amount of foreign exchange withdrawn abroad. There is a credit limit and the banks charge the customer a certain amount of money for the service.
The matter became public in January after one of Nirav Modi's firms applied for more LOUs.
This time, the bank officials refused, saying the firm needed to show 100% collateral. When the firm objected, saying they were never asked to do so in the past, the matter was investigated. The bank officials scanned the records to discover that there was no trace of any such transaction.