In wake of the alleged Rs. 13,000 crore PNB fraud case that revolved around the LoUs, the RBI has decided to discontinue the practice of issuance of Letters of Undertaking (LoUs) and Letter of Comfort (LoCs) for trade credits with immediate effect.
“It has been decided to discontinue the practice of issuance of LoU/LOCs for trade credits for imports into India by AD category banks with immediate effect,” the RBI said in a circular.
However, the central bank allowed continuation of letters of credit and bank guarantees for trade credits for imports into India.
“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,” it added.
In biggest fraud involving Indian banking system, fashion jeweller Nirav Modi duped Punjab National Bank by using the Letter of Undertaking issued by the bank in favour of three firms of Modi allowing him to seek credit from foreign branches of Indian banks.