Mumbai: RBI has barred banks from issuing guarantees in the form of letters of undertaking (LoU) as it clamped down on the import financing route used by fugitive jeweller Nirav Modi and his uncle Mehul Choksi for allegedly committing India’s biggest bank fraud.
The Reserve Bank of India also banned with immediate effect issuance of letters of comfort which, like LoUs, are used by importers to fund their overseas purchases.
However, letters of credit and bank guarantees will continue upon meeting certain conditions, the central bank said in a press statement.
Companies belonging to Modi and Choksi allegedly colluded with employees of Punjab National Bank’s Brady House branch in Mumbai to obtain fraudulent LoUs, without providing any margin money as security. They did not have any pre-approved credit limit either.