Scrapping of LoUs by RBI will raise cost of credit: CII

Scrapping of LoUs by RBI will raise cost of credit: CII

The RBI on Tuesday barred banks from issuing guarantees in the form of letters of undertaking (LoU) to prevent any further misuse of the facility as was done by rogue jewellers Nirav Modi and his uncle Mehul Choksi in the massive PNB fraud.

The Reserve Bank of India has suspended letters of undertaking (LoUs) or assurances for overseas credit after the Rs. 12,600 crore Punjab National Bank (PNB) extortion was uncovered a month ago. However, it mentioned that the changes will be applicable from the date of issuance of the circular.

On Monday, it was reported that some 30 banks paid out funds based on letters of undertaking (LoUs) issued by the PNB on behalf of Modi, Choksi and their companies.

The committee had called for a wider probe in the PNB scam.

The latest regulatory clampdown by the RBI came in the wake of fraud in Punjab National Bank.

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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, Gill India, Nakshatra Brand and Asmi Jewellery India for the additional fraud amount.

According to the CBI, Shetty as deputy manager of the Brady House branch of PNB issued the LoUs fraudulently during the period 2016-17 for the benefit of absconding accused Modi and his companies.

The sector also got a boost on news that Bank of India recovered about 70 billion rupees ($1.08 billion) that had earlier been categorized as bad loans.

Banking sources, however, said such an agreement was not yet a done deal. 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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