RBI had cautioned banks multiple times on SWIFT misuse: Government

  • RBI had cautioned banks multiple times on SWIFT misuse: Government

RBI had cautioned banks multiple times on SWIFT misuse: Government

Mumbai: In a major decision, the RBI on Tuesday banned banks from issuing Letters of Undertaking (LoUs) - instruments used allegedly by diamantaire Nirav Modi and his uncle Mehul Choksi to defraud state-owned PNB of almost Rs 13,000 crore in conniva-nce of bank officials.

In Nirav Modi's case, LoU is a bank guarantee and was issued for overseas payment. A letter of comfort is typically provided by a bank to assure the financial soundness of its customer to repay its debt.

However, letters of credit and bank guarantees for trade credit will continue upon meeting certain conditions, the central bank said. Banks charge a fee from the importer for the LoU.

Shares of state-run banks rose on Tuesday after a report said Punjab National Bank (PNB) will compensate lenders who have lost money in an alleged fraud, and as easing inflation data allayed fears of a policy rate rise. "Before the PNB episode came to light, I never came across the gem and jewellery trade resorting to LoU/LoC for trade credit".

The PNB scam by diamantaire Nirav Modi and his uncle Mehul Choksi involved using LoUs issued in favour of the accused by bank employees who misused their access to PNB's SWIFT - the electronic messaging system used for overseas funds transfers. Indian banks in Hong Kong paid the "suppliers" of these firms based on the LoUs.

India's central bank ordered commercial banks on Tuesday to stop issuing with immediate effect guarantees in the form of letters of undertaking - which are at the heart of the country's biggest bank fraud - in the latest regulatory clampdown.

While the firms said they had been availing themselves of this facility in the past too, a check of the branch's records did not reveal details of such facility granted to them.

The RBI has already started a special audit of public sector banks wherein it will closely scrutinise their trade financing activities especially with regards to the issuances of LoUs.