India's central bank scraps guarantee system in wake of bank fraud

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PNB had previously pegged its exposure to the Gitanjali companies at Rs 6,138 crore.

So far, there have not been any comments from either the Gitanjali group or Mehul Choksi.

The Reserve Bank of India on Tuesday barred all lenders from issuing letters of undertaking - a form of credit guarantee at the heart of a major fraud - as embattled Punjab National Bank disclosed its total exposure in the case had risen by another $145 million.

Modi and Choksi were helped by rogue PNB staff. Globally though, letters of credit and bank guarantees are the followed norm.

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The Parliamentary Standing Committee on Finance, headed by Congress member M Veerappa Moily, in a report, said that "many Indian banks including State Bank of India, Union Bank of India, Allahabad Bank, Axis Bank and some foreign banks, lent money to many entities or companies based on the alleged fraudulent guarantees".

The difference between these products is that LoUs and LoCs were issued by domestic banks at the behest of the importer. The money thus raised is used to make payment to offshore suppliers in for-eign currency. A special court in Mumbai had issued non-bailable warrants early this month on the request of the Enforcement Directorate.

PNB says junior employees at the branch issued LoUs over the SWIFT interbank messaging system without entering any of these transactions on the bank's own system.

Both Modi and Choksi are overseas and have refused to return to face trial.

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"The decision of RBI to discontinue Letters of Understanding and Letters of Comfort for trade credit would have a disruptive impact on the buyers' credit market, in the immediate term", CII President Shobana Kamineni said in a statement here.

The CBI too is probing the case.

Indian investigators have so far arrested almost 20 people, including some senior executives of companies owned by Modi and his uncle Mehul Choksi as well as high-ranking officials of the Punjab National Bank, in the bank fraud probe.

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