Nearly a month after the Rs 12,700 crore fraud at the Punjab National Bank (PNB) came to light, the Reserve Bank of India announced to end the Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for trade credit. The central bank’s decision came after it was alleged that diamond czar Nirav Modi obtained fake LoUs to pull-off the fraud by colluding with a former bank employee.
“On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect,” the RBI said in a statement. However, Letters of Credits and Bank Guarantees for trade credits for imports into India may continue to be issued.
Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) are
Letters of Undertakings or LoUs are a form of lending issued by one bank to the overseas branches of other Indian banks as an assurance to meet a liability on customer’s behalf
Source: Financial Express