Published: Wed, March 14, 2018
Business | By Max Garcia

PNB to honour claims by banks, but with conditions

PNB to honour claims by banks, but with conditions

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 USA dollars.

The money was later allegedly funnelled to shell companies set up by Modi and his uncle Mehul Choksi.

According to recent reports, Punjab National Bank (PNB) has written a letter to Nirav Modi, the kingpin behind the largest banking scam, to repay the entire amount as soon as possible and also expressed their views of not agreeing to any kind of settlement with him.

Tuesday's disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark.

The central bank's move is likely to lead to a freeze in trade financing activities in India, increasing costs for importers who have relied on these instruments to get cheaper overseas credit to pay suppliers. LOUs are issued only after a bank ensures that the customer has sufficient funds or assets to recover the amount of foreign exchange withdrawn overseas, and it comes with a credit limit and a charge is levied for the service.

"On a review of the extant guidelines, it has been made a decision to discontinue the practice of issuance of LoUs/LoCs for trade credits for imports into India by authorised dealer (AD) Category-I banks with immediate effect", the central bank said in a notification. It said banks could continue issuing credit guarantees in the forms of letters of credits and bank guarantees, however, if certain parameters were met.

As per the investigation, three companies owned by Nirav Modi with the connivance of the Bank Officials got LOUs issued was totally in violation of rules.

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. "A LoU does not have these details and when it is not linked to the banking system it can not be traced, like it happened with PNB". Solar Exports, Stellar Diamonds and Diamond R U.S. 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 acts of Shetty prima facie disclose commission of offence punishable under section 409 IPC along with other offences already alleged in the FIR", read the CBI's submission before the special court.

Last month, Nirav Modi commented saying, that PNB had closed all doors of recovering dues for his brand by going public.

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