PNB scam fallout: RBI bars banks from issuing LoUs, LoCs

PNB fraud case RBI discontinues system of issuing Letters of Undertaking system

India's central bank for the first time scrapped the system of issuance of guarantees like Letters of Undertaking (LOU) and Letters of Comfort (LOC) in the wake of the biggest-ever bank fraud of 1.8 billion US dollars.

However, the regulator said that the Letters of Credit and bank guarantees may continue to be issued, subject to meeting certain rules.

Bankers said letters of credit involved more paperwork and the due diligence was more stringent than letters of undertaking.

Punjab National Bank fell 3.5%, Bank of India retreated 3.2% and Canara Bank dropped 3.1%. The CBI had on Tuesday sought adding the section in the FIR against Modi's uncle Mehul Choksi as well.

The latest regulatory clampdown by the RBI came in the wake of fraud in Punjab National Bank (PNB), as the regulator tries to plug a loophole and improve due diligence in trade credit by banks.

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

The alleged fraud has shaken India's banking sector, leading to a government and central bank crackdown on lenders' systems and practices.

These bank ensures purportedly helped Mr Modi raise here and now credits from outside branches of Indian banks to pay to providers of crude material, for example, unpleasant stones. In order to ensure that the trend is arrested, the RBI has barred Indian banks from issuing LOUs and LOCs to its customers.

This comes after the CBI on Feb 14 received complaints from PNB, which detected a Rs 11,292 crore fraud involving billionaire diamond merchant Nirav Modi. As an after effect, bank stocks were under pressure on Wednesday morning with the Nifty PSU Bank sub-index tanking nearly 2 per cent in the initial half hour of trading.

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