PNB fraud fallout: RBI's ban on LoUs to hit import dependent businesses

Punjab National Bank Says Will Honour Banks' Claims But With Conditions

The logo of Punjab National Bank is seen on a branch office window in New Delhi India

The fraud which began in March 2011, is now estimated to have crossed $2 billion (about Rs 13,000 crore).

The fair market value of the iconic Rhythm House, acquired by Modi's firm Firestar Diamond International Pvt Ltd in March 2017, is pegged at Rs 32 crore, the same price at which Modi acquired it a year ago from Mehmood Curmally.

An unidentified lawyer for Choksi told Reuters that he was unaware of the new allegations, and refused to comment.

"On an audit of the surviving rules, it has been chosen to cease the act of issuance of LoUs/LoCs for Trade Credits for imports into India by AD Category I keeps money with quick impact", the national bank said in a notice.

LOUs and LOCs are by far the two main instruments issued by banks to domestic importers to enable them to receive foreign exchange from Banks at cheaper rates. They did not have any pre-approved credit limit either. This buyer's credit is provided on the basis of an LoU, which is akin to a guarantee and is issued by the importer's local bank.

Inflation falls to 4.4 per cent, factory growth rises
The RBI targets inflation over the medium term at 4 percent with an upper limit of 6 percent and a lower threshold of 2 percent. The manufacturing sector saw growth quickening marginally to 8.7% in January from 8.4% in the previous month.

Lenders will have to look at alternative instruments like bank guarantees.

Letters of Credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with (certain) provisions.

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. Solar Exports, Stellar Diamonds and Diamond R United States belonging to high-end jeweller Modi and Choksi-promoted Gitanjali Gems, Gili India and Nakshatra are alleged to have been involved in the scam.

The RBI also banned with immediate effect issuance of letters of comfort which, like LoUs, are used by importers to fund their overseas purchases. The CBI has registered two separate FIRs in the fraud and most of the accused are common in both cases.

The PNB, the country's second-biggest state-run lender, filed a supplementary complaint to the Central Bureau of Investigation (CBI) on March 4 against Gitanjali Gems Ltd, Gill India Ltd, Nakshatra Brand Ltd and Asmi Jewellery India Ltd for the additional fraud amount.

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