More Choksi frauds detected, PNB scam pegged at Rs 13900cr


Mumbai: In the wake of the Rs 12,900 crore scam detected at the Punjab National Bank (PNB), the RBI on Tuesday made a decision to discontinue the practice of issuance of letter of undertakings (LoU) or letter of comfort (LoC) for trade credits for imports into India with immediate effect.

LoUs were allegedly used by diamantaires Nirav Modi and his uncle Mehul Choksi to defraud the state-owned bank in connivance with its officials.

The Punjab National Bank has told police that it has uncovered additional exposure of about 9.42 billion rupees ($145.2 million) in connection with a massive alleged fraud, according to a court filing seen by Reuters.

PNB had previously pegged its exposure to the Gitanjali companies at Rs 6,138 crore. This buyer's credit is provided on the basis of an LoU, which is akin to a guarantee and is issued by the importer's local bank. They did not have any pre-approved credit limit either. Bankers say the scrapping of LoU/LoC is unlikely to impact trade credit as banks can issue Letters of Credit (LC) and Bank Guarantees for trade credits for imports.

The banned LoUs and LoCs meant receiving banks depended completely on the issuing bank on creditworthiness. The money thus raised is used to make payment to offshore suppliers in for-eign currency.

A letter of credit is an assurance from the bank that if the importer defaults, the bank will pay on his behalf.

Nirav Modi obtained his first fraudulent guarantee from PNB's Brady House branch in Mumbai on March 10, 2011 and managed to get 1,212 more such guarantees over the next 74 months, Finance Minister Arun Jaitley said on Tuesday. "A LoU does not have these details and when it is not linked to the banking system it can not be traced, like it happened with PNB".

A multi-agency probe, including by the Central Bureau of Investigation and the Enforcement Directorate, has been launched into the PNB fraud. "CBI said this in an application for incorporating Section 409 of the IPC in the second FIR pertaining to Choksi controlled firms".

Punjab National did not immediately respond to requests for comment.