India’s central bank bans letters of undertaking but spares L/Cs and guarantees in clampdown on diamond trade fraud

India’s central bank has banned the use of letters of undertaking (LoUs) by importers but has told banks not to groundlessly refuse import letters of credit (L/Cs) or bank guarantees.

Trade-based financial crimes allegedly perpetrated by celebrity jeweller Nirav Modi and corrupt officials at Punjab National Bank (PNB) centred on the use of LoUs, but several other schemes involving L/C fraud in the diamond trade have also come to light over recent weeks.

Trade finance squeeze

The Reserve Bank of India’s (RBI’s) ban on banks extending LoUs to importers as a form of credit guarantee has raised concerns about a trade finance squeeze.

The RBI has however specifically said that L/Cs and bank guarantees are not barred so long as deals fall within the central bank’s strict parameters.

Overseas loans

LoUs issued by domestic branches of Indian banks became popular among Indian diamond importers as a means of obtaining dollar-denominated bank loans overseas.

According to state-owned PNB, LoUs extended to Modi were key to the US$1.9 billion fraud it revealed earlier this year.

Bank collusion

In what will probably turn out to the biggest bank fraud in India’s history, the celebrity jeweller in collusion with PNB staff used fraudulently issued LoUs to obtain credit from overseas branches of Indian banks. Modi’s lawyers have denied the allegations.

Other lenders tied up in the case include market leader State Bank of India and privately owned Axis Bank. They allegedly made local currency payments to designated bank accounts in several countries, including Belgium and Mauritius.

Categories: Trade Based Financial crimes News

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