Published: Wed, March 14, 2018
Finance | By Claude Patterson

Run banks rise on PNB compensation hopes, easing rate woes

Run banks rise on PNB compensation hopes, easing rate woes

On Monday, it was reported that some 30 banks paid out funds based on letters of understandings (LoUs) issued by the Punjab National Bank (PNB) on behalf of billionaire diamantaire Nirav Modi, his uncle Mehul Choksi and their companies.

"It has been chose to discontinue the practice of issuance of LoUs/ LoCs (Letters of Comfort) for trade credits for imports into India by AD Category-I banks with immediate effect", the notification said.

After the unearthing of the PNB fraud, an RBI notification last month said: "The risks arising from the potential malicious use of the SWIFT infrastructure has always been a component of their operational risk profile".

However, the RBI has allowed banks to issue letters of credit and bank guarantee for trade credits for imports into India subject to complia-nce with the provisions.

Both Modi and Choksi have denied wrongdoing, and so have two key accused PNB employees in the case that has been dubbed as India's largest ever bank fraud.

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. The guaranties are given for import of all non-capital goods permissible under the Foreign Trade Policy (except gold), and up to three years for import of capital goods. This is with response to a Hindustan Times Report mentioning that Nirav Modi in an email had offered jewelry worth Rs. 2,000 crore, current account deposits of Rs 200 crore and immovable properties of Rs 50 crore to settle part of his liabilities.

During issuance of LoU, there are four parties involved - issuing bank, receiving bank, importer and beneficiary entity overseas.

"Switching off of Swift server (LTE) by 10 pm, and restricting Swift operations at branches to 6.30 pm and centralised back office for trade finance by 7 pm", is another step taken by PNB.

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