India cenbank bars issuance of letters of undertaking for trade credit

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"On a review of the extant guidelines, it has been made a decision to discontinue the practice of issuance of LoUs/LoCs for trade credits for imports into India by authorised dealer (AD) Category-I banks with immediate effect", the central bank said in a notification.

Also, AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers.

State Bank of India and three other state-run banks, Union Bank of India, UCO Bank and Allahabad Bank, are among lenders who have extended credit based on the LoUs issued by PNB that were later found to be fraudulent.

The Reserve Bank of India on Tuesday barred banks from issuing guarantees in the form of letters of undertaking (LoU).

In today's plea before the special CBI court, the agency said it has filed another supplementary complaint about additional fraud of Rs 942 crore, taking the total amount of fraud to Rs 7,080 crore.

The buyer's credit usually goes to an overseas nostro account from where the payment to the importer's bank is made. "This is clearly a risk mitigating step as letter of credit are governed by Uniform Customs and Practice for Documentary Credits, which has a well defined set of rules and procedures", said a senior official at one of the public sector banks.

Thus, the earlier master circulation of RBI said, "Banks should not extend any non-fund based facilities or additional/ad-hoc credit facilities to parties who are not their regular constituents, nor should they discount bills drawn under LCs, or otherwise, for beneficiaries who are not their regular clients".

The central bank has also mandated commercial banks to put in place adequate audit and compliance mechanisms with bank board-level reporting through the audit committee of the board, the minister added. The change in regulations may hit import dependent businesses.