RBI discontinues Letters of Undertaking as instrument for obtaining overseas credit

The Reserve Bank of India (RBI) has decided to discontinue letters of undertaking (LoU) and letters of comfort as trade credits. The decision will be implemented with immediate effect.

“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,” said RBI in a notification.

Letters of Undertaking or LoU is a document issued by a bank guaranteeing a customer’s credibility and is used by the customer to make payments to offshore suppliers in the foreign currency and the amount is paid by a foreign branch of the same bank.

This decision comes after the multi-crore Punjab National Bank fraud came to light last month. Nirav Modi and Mehul Choksi, who is the prime accused in the case, scammed the bank by not repaying the loan within the prescribed time duration. The former fled the country a month before the scam was unearthed by the CBI. 

Nirav Modi had been taking LoUs from PNB’s Brady House branch in Mumbai under the name of his companies- Diamond R Us, Solar Exports, and Stellar Diamonds.

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