Nirav Modi got 1213 fraudulent guarantees in six years, says Arun Jaitley

The Reserve Bank of India headquarters in Fort Mumbai

RBI said in a notification, "On a review of the extant guidelines, it has been chose to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category -I banks with immediate effect".

Companies linked to Nirav Modi obtained Letters of Undertaking (LoUs), which were used to get loans from overseas branches of Indian banks, up to five guarantees on a single day, with the help of rouge employees of the country's second biggest state-run bank.

RBI in 2015 only observed that banks are extending non-fund based credit facilities like guarantees / stand-by letter of credits / letter of comforts etc. on behalf of JV / WOS / WoSDS for purposes which are not connected with their business, rather, in certain cases, these facilities are used to avail foreign currency loans for repayment of Rupee loans.

The instruments are all forms of trade finance often used by importers to fund their overseas purchases. Officials with direct knowledge also said letters of credit have more global acceptability, while letters of undertaking were mostly used between Indian banks. According to a court filing seen by Reuters, the police also told the court that Mehul Choksi's companies controlled by billionaire Nirav Modi defrauded the lender of Rs 708 crore.

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

The actual issuance of the LoU is the next step after the credit limits are sanctioned.

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

PNB did not immediately respond to requests for comment.

Investigators say three companies of Nirav Modi, with connivance of the officials of the Punjab National Bank, had got Letters of Undertaking issued in complete violation of rules.

PNB has said it will honour only "bona fide" commitments, arguing other banks that lent to the jeweller groups shared in the blame by not carrying out adequate checks.

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.

"The rate may go up by at least 70-120 basis points because the inter-bank market will dry up and not all banks have access to sufficient dollar liquidity", said Gupta.

"We are talking. But then we have not come to a conclusion", said a senior banker, who did not want to be named, adding that PNB had not yet provided concrete assurances of repayment. Banks charge a fee from the importer for the LoU.



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