RBI scraps bank LoUs in the aftermath of PNB fraud

The Reserve Bank of India has scrapped quasi bank guarantee instruments such as the Letter of Undertaking and Letter of Comfort that blew a Rs. 14,000 crore hole in the books of Punjab National Bank as the regulator attempts to plug a loophole and improve banks’ due diligence in trade credit.

Banks can continue to issue guarantees and letter of credit for trade purposes which are the international norm, and also have features that makes the claim on the issuer strong. 

"It has been decided to discontinue the practice of issuance of LoUs/ LoCs for trade credits for imports into India with immediate effect," the RBI said in a statement. "Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation," it said without saying why it is scrapping it. 


To check RBI Circular click here 


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