The Reserve Bank of India on Tuesday discontinued Letters of Undertaking (LoUs) and Letters of Comfort with regard to trade credits for imports with immediate effect. The announcement comes about a month after India’s biggest bank fraud was discovered, where letters of undertaking were issued fraudulently by employees at Punjab National Bank.
An LoU is a letter of credit, where one bank tells another that it will meet a customer’s liability. “It has been decided to discontinue the practice of issuance of Letters of Undertaking and Letters of Comfort for trade credits for imports into India by AD Category –I banks with immediate effect,” the statement said. “Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation.”
The Punjab National Bank has said it was defrauded of Rs 12,703 crore. The main accused, billionaire jeweller Nirav Modi and his partner Mehul Choksi, had left the country in early January, just weeks before the scam was made public. So far, they have both refused to return to India.