Published: Wed, March 14, 2018
Business | By Kate Woods

RBI bars banks from issuing LoUs in Nirav scam fallout

RBI bars banks from issuing LoUs in Nirav scam fallout

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.

Ajay Sahai, Director General of exporters' body Fieo said that the RBI decision should have very little impact on trade as bank guarantee and letter of credit continue to be available.

The RBI's action comes almost a month after PNB announced that it had detected fraudulent and unauthorised transactions at its Brady House branch in Mumbai.

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"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. Moreover, the buyer's credit raised was not used for specific purposes in many cases. 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only after a bank ensures that the customer has sufficient funds or assets to recover the amount of foreign exchange withdrawn overseas, and it comes with a credit limit and a charge is levied for the service.

The celebrity jeweller is said to have fled the country and was reportedly last seen in NY after his appearance at World Economic Forum in Davos as a member of the Indian delegation. In order to ensure that the trend is arrested, the RBI has barred Indian banks from issuing LOUs and LOCs to its customers.

An LoU is provided against a margin or a collateral which could be in the form of a fixed deposit.

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Banks would need to make provisions for any potential losses from fraud when they report results for the March quarter, said the banker. On the other hand, an LoC is an instrument which is similar to an LoU, except that it is an intra-bank transaction. The payment can also be made directly to the importer.

"The selling in banking stocks on rising delinquencies along with RBI's move to ban LoUs and a weak worldwide market is weighing on domestic stocks", said Saurabh Jain, assistant vice president of research at SMC Global Securities. Those who have been enjoying this facility would suddenly find themselves cut-off from this trade-financing channel.

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