RBI scraps LoUs from banks for trade credit

RBI scraps LoUs from banks for trade credit

The RBI had issued two circulars in 2016 to banks on strengthening the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system, the misuse of which was unveiled last month in the Rs 12,600 crore fraud on state-run Punjab National Bank (PNB), Parliament was informed on Tuesday.

The Punjab National Bank told police officials that it has uncovered additional exposure of about Rs 942 crore in connection with the massive alleged fraud it is at the centre of, Reuters reported on Tuesday.

India's retail inflation eased for the second straight month in February but remained above the 4 percent medium-term target of the Reserve Bank of India (RBI).

The RBI also barred the issuance of letters of comfort, but said letters of credit and bank guarantees can be continued to be issued if certain rules are met.

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PNB, the second largest state-run bank, had on February 14 informed the exchanges of detecting Dollars 1.77 billion fraud at its Brady House branch in Horniman Circle area of south Mumbai and named the firms led by Modi and his uncle Mehul Choksi's Gitanjali Group and some other diamond and jewelry merchants as suspects. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs.

Thus, the earlier master circulation of RBI said, "Banks should not extend any non-fund based facilities or additional/ad-hoc credit facilities to parties who are not their regular constituents, nor should they discount bills drawn under LCs, or otherwise, for beneficiaries who are not their regular clients". Banks charge a fee from the importer for the LoU.

During issuance of LoU, there are four parties involved - issuing bank, receiving bank, importer and beneficiary entity overseas. Recent reports also highlight that, billionaire Modi has refused to join the CBI investigation related to the case, citing that he has a business overseas.

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