To prevent Nirav Modi-PNB like scams in future course of time, RBI with immediate effect has discontinued the use of letters of undertaking (LoUs) and letter of comforts (LoCs) for the purpose of trade financing activities.
In a notification, the central bank on Tuesday said, "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 statement by RBI added, "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 circular on "Guarantees and Co-acceptances", as amended from time to time."
RBI's decision has come in after it was alleged that Nirav Modi secured fake LoUs by colluding with a former bank personnel. The PNB scam since it came to light on February 14 has scaled in quantum of fraud to now value Rs. 13,640 crore from the initial Rs. 11,400 crore.
The discontinuance of these lending instruments for trade credits will without doubt affect the businesses engaged in imports of goods and services to India.