PNB exposure to alleged fraud swells to well above $2 bn

Lloyd Doyle
March 13, 2018

The RBI, in a notification to all banks, said it has made a decision to discontinue the practice of issuance of LoUs and letters of comforts (LoCs) for trade credits for imports into India by banks with immediate effect. The fraudulent issuance of LoUs came to light when one of the branch officials asked the firms associated with the diamantaires to furnish at least 100 per cent cash margin for issuing LoUs. This is essentially a short-term foreign currency loan on which banks charge say 60 to 90 basis points over the London Interbank Offered Rate or Libor - the worldwide benchmark for pricing loans or lending. Officials with direct knowledge also said letters of credit have more global acceptability, while letters of undertaking were mostly used between Indian banks.

Companies linked to Modi and his uncle Mehul Choksi defrauded PNB to the tune of Rs 13,600 crore.

Tuesday's disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark.

PNB said the additional amount did not involve any fraudulent letters of undertaking, but was sanctioned credit to Gitanjali group that it was recalling and adding to the total amount defrauded.

A lawyer for Choksi said he was unaware of the new allegations and declined to comment.

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.


Noting that the RBI has instructed banks to "strengthen their SWIFT operating environment", Shukla said the central bank has also constituted an expert committee to look into factors "leading to increasing incidence of frauds in banks and the measures (including information technology interventions) needed to curb and prevent it, and the role and effectiveness of various types of audits conducted in banks in mitigating the incidence of such frauds".

In wake of the recent Nirav Modi-PNB Scam that shook India's banking sector, the Reserve Bank of India (RBI) on Tuesday ordered commercial banks to stop issuing guarantees in the form of Letters of undertaking (LoU).

ET, citing sources, said PNB has agreed to honour claims due by end-March but has mandated that peer banks will have to pay PNB if investigative authorities prove that there was malafide intent on the part of these banks.

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

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".

Other reports by Iphone Fresh

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