RBI had cautioned banks multiple times on SWIFT misuse: Government

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In a major decision, the Reserve Bank of India (RBI) on Tuesday banned banks from issuing Letters of Undertaking (LoUs) - instruments used allegedly by diamantaire Nirav Modi and his uncle Mehul Choksi to defraud state-owned PNB of Rs almost 13,000 crore in connivance of bank officials.

However, "letters of credit and bank guarantees for trade credits for imports into India may continue to be issued subject to compliance with" existing regulations, a notification from RBI said.


Among others, the agency has arrested Gokulnath Shetty, the then deputy manager (now retired) of PNB, in connection with issuance of fraudulent letters of undertaking (LoUs) to Choksi-owned firms. This is with response to a Hindustan Times Report mentioning that Nirav Modi in an email had offered jewelry worth Rs. 2,000 crore, current account deposits of Rs 200 crore and immovable properties of Rs 50 crore to settle part of his liabilities.

RBI in 2015 only observed that banks are extending non-fund based credit facilities like guarantees / stand-by letter of credits / letter of comforts etc. on behalf of JV / WOS / WoSDS for purposes which are not connected with their business, rather, in certain cases, these facilities are used to avail foreign currency loans for repayment of Rupee loans. Banks charge a fee from the importer for the LoU.


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.

Thus, many Indian banks' overseas branches sanctioned forex credit.


As a trade financing measure, overseas banks usually lend to importers based on the LoUs issued by the importers' bank. Recent reports also highlight that, billionaire Modi has refused to join the CBI investigation related to the case, citing that he has a business overseas.

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