PNB fraud fallout: RBI scraps Letters of Undertaking system

Mumbai: The Reserve Bank of India (RBI) on Tuesday discontinued the system of issuing Letters of Undertaking (LoUs) by banks for availing trade credits for imports into India in the wake of the Rs 12,600 crore fraud on state-run Punjab National Bank (PNB) unveiled last month. According to an RBI notification, the move will come into effect immediately. "It has been decided to discontinue the practice of issuance of LoUs/ LoCs (Letters of Comfort) for trade credits for imports into India by AD Category-I banks with immediate effect," the notification said. "Letters of credit and bank guarantees for trade credits may continue to be issued subject to compliance with the regulations." LoUs are bank guarantees through which a bank allows customers to raise money from another Indian bank's foreign branch as short-term credit. The PNB scam by diamantaire Nirav Modi and his uncle Mehul Choksi involved using LoUs issued in favour of the accused by bank employees who misused their access to PNB's SWIFT -- the electronic messaging system used for overseas funds transfers. None of these fraudulent transactions were registered on the bank's internal transaction messaging system, the Core Banking Solution (CBS), enabling the fraud to go undetected for long.