In the continuing aftermath of the PNB Nirav Modi scam, RBI today announced that it had scrapped Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits. The RBI has said that on review of the guidelines in force for the use of LoUs and LoCs, it has 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 notification further mentions that while Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) have been discontinued, Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions existing in the RBI circulars.
It may be noted that the genesis of the PNB Nirav Modi scam was in the fraudulent Letters of Undertaking (LoUs) issued by the Indian branch of PNB at Mumbai, which were relied upon by foreign bank branches, to extend credit facilities to firms owned by Nirav Modi.
This move by RBI may impact many businesses but it seems to be a calculated move taken in order to minimise damage through fraudulent or incorrect LoUs.