Available at: https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10201
RBI, Master Direction 17 – Import of Goods and Services
Issue of Guarantees by an Authorised Dealer
B.8.1 An authorised dealer may give a guarantee in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India, as an importer, in respect of import on deferred payment terms in accordance with the approval by the Reserve Bank of India for import on such terms.
B.8.2 An authorised dealer may give guarantee, Letter of Undertaking of Letter of Comfort in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India (being an overseas supplier of goods, bank or a financial institution), for import of goods, as permitted under the Foreign Trade Policy announced by Government of India from time to time and subject to such terms and conditions as may be specified by Reserve Bank of India from time to time.
B.8.3 An authorised dealer may, in the ordinary course of his business, give a guarantee in favour of a non-resident service provider, on behalf of a resident customer who is a service importer, subject to such terms and conditions as stipulated by Reserve Bank of India from time to time:
Provided that no guarantee for an amount exceeding USD 500,000 or its equivalent shall be issued on behalf of a service importer other than a Public Sector Company or a Department / Undertaking of the Government of India / State Government:
Provided further that where the service importer is a Public Sector Company or a Department / Undertaking of the Government of India / State Government, no guarantee for an amount exceeding USD 100,000 or its equivalent shall be issued without the prior approval of the Ministry of Finance, Government of India.
B.8.4 An authorised dealer may, subject to the directions issued by the Reserve Bank of India in this behalf, permit a person resident in India to issue corporate guarantee in favour of an overseas lessor for financing import through operating lease effected in conformity with the Foreign Trade Policy in force and under the provisions of the Foreign exchange Management (Current Account Transactions) Rules, 2000 framed by the Government of India vide Notification No. G. S. R. 381 (E) dated May 3, 2000 and the Directions issued by Reserve Bank of India under Foreign Exchange Management Act, 1999 from time to time.
73 comments:
A very important instrument that is LoU was mishandled by the bank employees in the recent case of nirav modi and mehul choksi shows us that even after having all the mechanisms in place to ensure the smooth linear growth of the economy, financial cowardice will prevail untill necessary stringent steps are taken
Mihir Abhay Bedekar
17BAL089
All you need to know about LoUs, SWIFT code and why bank unions smell bigger fish behind PNB scam
Chennai: Only the naive would believe that just two officials were involved in the $1.8 billion fraud in Punjab National Bank (PNB) and that the whole bank was in the dark for the past seven years, said a top leader of a major bank union.
He also asked the PNB management to reveal what kind of due diligence was done on diamond trader Nirav Modi and his companies before extending a loan of Rs 1,700 crore.
"The PNB management is blaming other banks for not sharing details of their due diligence done on Modi's business. The $1.8 billion fraud is done on non-fund based transaction. The PNB management has to clarify what kind of due diligence it had done while lending to Modi's firms a sum of Rs 1,700 crore," C H Venkatachalam, General Secretary, All India Bank Employees' Association (AIBEA) told IANS.
He also said the BJP government has not appointed workman and officer directors in public sector banks and that had weakened the checks and balances.
The PNB had said the alleged fraud was carried out by two staffers by not entering the transactions in the bank's core banking solution but only in SWIFT signalling another bank's overseas branch that the transaction is valid.
AP image.AP image.
According to PNB's complaint, some fraudulent issuance of Letters of Undertakings (LoU) were detected at its Brady House branch in Mumbai. The complaint said that the fraud came to light after the retirement of the deputy manager in the Brady House branch when employees of a set of partnership firms linked to diamond trader Nirav Modi presented import documents and asked for credit to pay their suppliers in January this year.
The branch officials had asked for 110 per cent margin for issuance of LoU.
However the partnership firms argued that they had been availing such a facility in the past, but the branch officials did not find any official record in support of their argument.
It is clear, PNB stumbled upon the fraud by providence and not by its own intelligence, Venkatachalam said.
Simply put, LoU is a guarantee issued by a bank to another bank or its branch located in a foreign country. As per the LoU, the foreign bank or the foreign branch of an Indian bank would deposit the required sum in the Nostro account of the LoU issuing bank in that country. The importer then is paid the money.
When the borrower defaults, the foreign bank or the foreign branch of an Indian bank would claim its dues from the bank that issued the LoU.
According to PNB, the total fraud discovered linked to diamond trader Modi under the LoU was around $1.8 billion.
"There must be involvement of top officials of PNB to facilitate Modi's fund needs. A high profile person like Modi would not directly deal with a low level officials at branch level," Venkatachalam said.
A retired senior official of a government bank K Srinivasan told IANS, “LoUs are issued for a fee. Banks daily deploy their funds in various investment avenues including call money market. So, huge deposit in Nostro account would have been known to the PNB. Further the fee earned on such LoUs must have been booked," Srinivasan said.
Srinivasan said, PNB management cannot simply say for seven years they were in the dark about the fraud.
Similarly, it is strange as to how the auditors -- internal, statutory and concurrent -- as well as the inspection team from RBI missed to check the deposits in Nostro accounts, the withdrawals from there and the fee income earned on LoUs, Srinivasan said.
Meanwhile, the Reserve Bank of India (RBI) some time back had asked the Indian banks to link core banking solution and the SWIFT network and also encrypt the messages sent using the SWIFT system, said a senior official in a core banking solution company.
"Some of the old version of core banking solution are not linked to the SWIFT system. As a result, bankers used to feed the fund transfer or other transactions in their core banking system and then send the necessary message to an overseas bank using the SWIFT console, the senior official in a banking software company told IANS preferring anonymity.
The SWIFT or the Society for Worldwide Interbank Financial Telecommunication is a network used by financial institutions to communicate financial transactions.
He said the PNB must have been using the old version of core banking solution without updating the same.
Published Date: Feb 16, 2018 19:16 PM | Updated Date: Feb 16, 2018 19:43 PM
LoU is a guarantee issued by a bank to another bank or its branch located in a foreign country. As per the LoU, the foreign bank or the foreign branch of an Indian bank would deposit the required sum in the Nostro account of the LoU issuing bank in that country. The importer then is paid the money.
When the borrower defaults, the foreign bank or the foreign branch of an Indian bank would claim its dues from the bank that issued the LoU.
According to PNB, the total fraud discovered linked to diamond trader Modi under the LoU was around $1.8 billion.
"There must be involvement of top officials of PNB to facilitate Modi's fund needs. A high profile person like Modi would not directly deal with a low level officials at branch level," Venkatachalam said.
A retired senior official of a government bank K Srinivasan told IANS, “LoUs are issued for a fee. Banks daily deploy their funds in various investment avenues including call money market. So, huge deposit in Nostro account would have been known to the PNB.
Karan
17bal085
letter of understanding is issued by the bank as a guarantee to do the overseas trading. here if the person for which bank has given guarantee make a default, bank is liable to pay the debt amount unconditionally. they are used to avail short term loan s from foreign banks.in order to get an LOU a person should give a collateral security to the bank in form of assets or deposits. The validity of procedure of issuing LOU came into question after gem scan of nirav modi. It is being said that Punjab national bank's employee gave LOU to nirav modi without fixing any credit limit or without taking any pre-required money, which they should in general scenario.
MANYA ANJARIA
17BAL088
letter of understanding is a bank guarantee and is issued for overseas import payments.A bank while issuing LoUs for a client agrees to repay the principal and interest on the clients loan unconditionally.When an LoUs is issued it involves a receiving bank ,an importer and a beneficiary entity overseas.In other words LoUs mainly allow its customers to raise money from another Indian bank's foreign branch in the form of short term credit and guarantee for a banks customer for making payment to its offshore suppliers in the foreign country.The recent case of Nirav Modi PNB fraud was filed against 3 companies and 4 people saying that they have defaulted the bank by managing them get letters of undertaking from it without having a sanctioned credit limit or maintaining funds on margin.
PRIYANGI MOHI
17bal097
Letter of undertaking (LOU) is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's customer for making payment to its offshore suppliers in the foreign currency. As the transactions here are merely based on promises and some collateral, the banks should be very critical and selective while issuing such guarantees.
In the case of Nirav Modi, he gave the bank a bunch of fake gems as collateral and had them issue numerous LoUs for him. Here the bank staff was not strict enough and easily trusted Modi and ended up in a ditch as he robbed them out of ₹11000 crore.
Paridhi Galundia
17bal035
The latest fraud uses an age-old method employed to defraud the banking system. It involved LoUs raised at the PNB’s Mumbai office by firms owned by Modi and his family.
A LoU is issued by a bank to an importer (in this case Modi). It works like a bank guarantee, which the importer can sell to other banks at a discount. The importer receives the money, or letter of credit, and pays his client. The issuer bank messages overseas branches of other banks through the SWIFT network, and that bank immediately pays the client against the LoU. The bank that holds the LoU then goes back to the issuer bank (PNB in this case) and gets its due.
The issuer bank (PNB) recovers its due against the LoU from its client (Modi). Since the LoUs are used for importing goods and involve foreign currency, a vostro account (client’s overseas account) is used to deposit the credit by the bank accepting the LoU. However, issuance of the LoU involves a lot of process and to mitigate the risks of fraud, banks insist the client deposit an equivalent amount of assets, mainly cash, in the local branch, to avail of the overseas facility.
TANISHA PRASHANT
17BAL055
Letter of undertaking (LOU) is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. Letter of Undertaking forms the crux of the burning Nirav Modi-PNB Fraud. The fact that Letter of Credit was granted without having a sanctioned credit limit or maintaining funds "on margin" is the prime accusation.Since it is alleged that Letter of Undertaking was issued without proper authorization it is safe to presume that Nirav Modified had some official in the bank done him a favour. It is an imperative to realize that even after so many check and balances and various governing structures loophole still exist and that governance as to be made more stricter and effective.
17Bal025
After reading a news article in NDTV India website I got to know about LoUs which has some features and how it is related with a major scam involving this concept. The main features of LOUs are described below:
A. A widely accepted provision of bank guarantees known as a letter of undertaking (LOU) under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's customer for making payment to its offshore suppliers in the foreign currency.
B. For raising the LOU, the customer (importer) is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. But in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money, reported Reuters.
C. Once the letter of credit is acknowledged and accepted, the lender (foreign branch of Indian bank) transfers money to the nostro account of the bank that has issued the LoU. In this case, Nostro account is the Punjab National Bank's account held in another bank in a foreign country for the purpose of holding foreign currency.
D. As a matter of fact, letter of undertaking is a letter of credit issued by one bank (Punjab National Bank in this case) that paves way for another bank ( Allahabad Bank-AB) to give money to supplier of Punjab National Bank's customer. As mentioned earlier, the money is transferred by AB to supplier of PNB's customer via a nostro account that PNB holds in AB in abroad.
E. This credit is ideally meant for short-term. In the Nirav Modi-Mehul Choksi case, the term of loan was allegedly extended far beyond what is prescribed as per the rule book. Even the PNB and other lenders are slugging out over the loan term, which should not have been extended, says PNB, longer than 90 days.
In wake of the massive banking fraud involving collusion of two junior staffers of Punjab National Bank (PNB) with Nirav Modi and Mehul Choksi, the practice of issuing letter of undertaking has been in the news ever since. The Nirav Modi-PNB fraud came to light when on January 29, a PNB official from Mumbai filed a criminal complaint with Central Bureau of Investigation (CBI) against 3 companies, Solar Exports, Stellar Diamonds and Diamond R US, and four people, including Nirav Modi and Mehul Choksi, the managing director of Gitanjali Gems, saying they had defrauded the bank. The bank alleged two junior employees at the Mumbai branch who had helped the companies and people managing them get letters of credit or "letters of undertaking" (LoUs) from it without having a sanctioned credit limit or maintaining funds "on margin".
Shalini Mishra
17BAL107
The present Nirav Modi-PNB case is an apt example of the implicit loopholes in the present governing system that are exploited. The main contention of this huge issue is the unauthorized issue of Letter of Undertaking.
Letter of Undertaking is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. It has been questioned that norms laid down were not followed before issuing the Letter of Undertaking.
We need to ensure that governance of norms is improved to further avoid such scams in future.
17BAL046
letter of undertaking is type of guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. For the issuance of letter of understanding the customer have to marginal money to the bank that issue the letter of understanding and accordingly credit limit is also decided.
The present Punjab national bank fraud case is thee example of misuse of letter of understanding.Apart from the other systemic flaws in the Banking operations of PSU Banks, I am appalled that a low-ranking Manager of PNB had authority to issue LoUs worth crores of rupees, that too with no oversight internally or by auditors.
letter of undertaking is type of guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. For the issuance of letter of understanding the customer have to marginal money to the bank that issue the letter of understanding and accordingly credit limit is also decided.
The present Punjab national bank fraud case is thee example of misuse of letter of understanding.Apart from the other systemic flaws in the Banking operations of PSU Banks, I am appalled that a low-ranking Manager of PNB had authority to issue LoUs worth crores of rupees, that too with no oversight internally or by auditors.
MOHIT PALIWAL
17bal090
In order to get a letter of undertaking a person should give collateral security to the bank in the form of deposits or assets.An LoU issued by the bank to as a gurantee to do the overseas trading. The validity of procedure of issuing came into question after the biggest scam of nirav modi. It's been said that PNB's employee gave LoU without fixing any limit. The present nirav modi case is an apt example of the implicit loopholes in the present system, contention in the case was issue ofunauthorized Letter of undertaking
A Letter of Understanding(LoU) is issued by a bank to a borrower for getting a foreign credit. Whenever a borrower needs foreign currency,he can show LoU to the foreign branch of Indian Bank and can get the money.
The borrower can go to the foreign exchange department of the Bank and can ask for LoU.In exchange, the Bank will ask the customer to pay a guarantee in terms of fixed deposits.After receiving the LoU the borrower can submit it to the overseas bank and can get the amount but the amount is not transferred directly in the amount, it get deposited to a specific bank account of the banker which is called Nostro account.Whenever the borrower do any default in the transaction the Indian Bank issuing the LoU is answerable.
The Banks has different benefits associated with issue of Letter of Understanding. The Indian Bank issuing LoU charges a fees, whereas the overseas Bank get interest over the amount that it issues, while the borrower get the credit facility.
Letter of understanding is a formal summary of Terms and conditions and understanding of the contract which is generally negotiated in spoken form. It reviews the terms of an agreement for a service and is a step prior to issuing of detailed contract.
In international market of banks, LOU acts as a provision for bank guarantee, under which the customer is allowed to raise money from another indian bank's foreign branch in form of short term credit.
The present nirav modi case is perfect examples of loopholes and flaws that prevail in the system and call for the better governance.
Letter of understanding is a formal summary of Terms and conditions and understanding of the contract which is generally negotiated in spoken form. It reviews the terms of an agreement for a service and is a step prior to issuing of detailed contract.
In international market of banks, LOU acts as a provision for bank guarantee, under which the customer is allowed to raise money from another indian bank's foreign branch in form of short term credit.
The present nirav modi case is perfect examples of loopholes and flaws that prevail in the system and call for the better governance.
Rakshita Shukla
17bal100
letter of comprehension is issued by the bank as an assurance to do the abroad exchanging. here if the individual for which bank has given certification influence a default, to bank is at risk to pay the obligation sum genuinely. they are utilized to profit here and now advance s from outside banks.in request to get a LOU a man should give an insurance security to the bank in type of benefits or stores. The legitimacy of technique of issuing LOU came into question after diamond sweep of nirav modi. It is being said that Punjab national bank's employee offered LOU to nirav modi without settling any credit constrain or without taking any pre-required cash, which they ought to by and large situation.
Govind saini
17bal082
In simple terms, letter of understanding (LoU) refers to bank guarantee under which a bank allows its customer to raise money from another Indian bank's foreign branch which is only available for short-term credit requirements.This guarantee that a bank gives its customer has certain terms and condition to avoid people from committing frauds with the banks. A credit limit of 500,000 U.S dollar has been set up for issuing LoU.
Also, there is a concept of margin money that a customer needs to pay to the bank in order to give the customer a limit of money that would be assured by the bank.
But to make this system of issuing LoU safe, there is a system known as SWIFT as whenever LoU is issued, a message of transfer of credit is conveyed to the overseas bank by a SWIFT system.
In today's world where anything can be exploited by people to make money, recently such an incidence has also taken place in form of PNB fraud where Nirav Modi and Mehul Choksy, two diamantaires with help of two PNB employees did fraud with PNB by issuing a couple of fake LoU's resulting in loss of 11,400 crores of India's second largest PSU.
MONIKA PRAJAPAT
17BAL091
Letter of undertaking are used by a bank’s customer to avail short-term credit in a foreign country.
The borrower uses her existing credit relationship with a bank in India to avail the required credit outside the country. “An authorised dealer may give a guarantee, letter of undertaking in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India for import of goods.
Best example of LoU is multi-crore fraud involving the Punjab National Bank and nirav modi.
Om shankar kiradoo
17BAL094
Simple definition from Wikipedia: A Letter of Understanding or LOU is a formal text that sums up the terms and understanding of a contract which mostly has been negotiated up to this point only in spoken form. But here it is issued by bank so as to provide surety of payment from one party on behalf of which bank is issuing LoU.
I don't have much knowledge of LoUs but as it is the root of major burning issue i got to know about the same from Nirav Modi's case as how a simple peice of paper can shock an economy when it is not used wisely.
In recent scam of PNB where Nirav modi had some staff in his pocket made them to issue LoUs which led to all fraud.
The main culprits here are the top management of the bank and the auditors. How they could NOT have caught this is simply beyond rational imagination – and therefore points to people knowing it but letting it continue.
17bal065
Aayushi jain
Letter of understanding is a very important tool but referin to the new case of Nirav Modi , this tool can be misused to get benefits of the loopholes to swindle money into various bank accounts.
Therefore, it is highly imperative on the part of PSU banks, that these things should be taken care of to tackle macroeconomic policies .
Ayushi dubey
17BAL015
Letter of understanding is a very important tool but referin to the new case of Nirav Modi , this tool can be misused to get benefits of the loopholes to swindle money into various bank accounts.
Therefore, it is highly imperative on the part of PSU banks, that these things should be taken care of to tackle macroeconomic policies .
Ayushi dubey
17BAL015
Letter of undertaking is an instrument issued by a Indian bank on behalf of its client to an foreign branch of Indian bank.
For example if 'X' in delhi imports something from Singapore via 'y' firm than if he wants to make payment to 'y' in his bank 'b' in this case an Indian bank will issue an Letter of undertaking to bank 'b' of Singapore. Here the Indian bank will act as an guarantee on behalf of 'x'.
LoU is a guarantee issued by a bank to another bank or its branch located in a foreign country. As per the LoU, the foreign bank or the foreign branch of an Indian bank would deposit the required sum in the Nostro account of the LoU issuing bank in that country. The importer then is paid the money.When the borrower defaults, the foreign bank or the foreign branch of an Indian bank would claim its dues from the bank that issued the LoU.According to PNB, the total fraud discovered linked to diamond trader Modi under the LoU was around $1.8 billion.”There must be involvement of top officials of PNB to facilitate Modi's fund needs. A high profile person like Modi would not directly deal with a low level officials at branch level," Venkatachalam said.
Arjun Singh Tomar
17bal077
This Master Circular provides a framework of the rules/regulations/instructions issued by the Reserve Bank of India relating to the conduct of guarantee business by banks.
This Master Circular updates the previous instructions on the above subject contained in the Master Circular dated July 2, 2012
important criterion for judging the soundness of a banking institution is the size and character, not only of its assets portfolio but also, of its contingent liability commitments such as guarantees, letters of credit, etc. As a part of business, banks issue guarantees on behalf of their customers for various purposes. The guarantees executed by banks comprise both performance guarantees and financial guarantees. The guarantees are structured according to the terms of agreement, viz., security, maturity and purpose. With the introduction of risk weights for both on-Balance Sheet and off-Balance Sheet exposures, banks have become more risk sensitive, resulting in structuring of their business exposures in a more prudent manner. Banks should comply with the following guidelines in the conduct of their guarantee business.
Pragati Mishra
17bal038
In the current case of Nirav Modi, he gave the bank a bunch of phony gems as collateral and had them issue numerous LoUs for him. Here the bank staff was not strict enough and easily trusted Modi and ended up in a ditch as he robbed them out. Letter of undertaking (LOU) is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's customer for making payment to its offshore suppliers in the foreign currency. As the transactions here are merely based on promises and some collateral, the banks should be very critical and selective while issuing such guarantees. In the process cheating banks of large amounts of money.
Shubhsmita
17bal051
Letter of Undertaking is a bank guarantee under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank.
So, let’s an example of Nirav Modi, whose diamonds have sparkled on the necklines of Bollywood and Hollywood A-listers, wants to import diamonds for a new collection. He approaches PNB and asks it to arrange for a guarantee in the form of LoU for short-term loans from the foreign branches of Indian banks, to pay his diamond supplier. Bank officials promptly send instructions from PNB’s Mumbai branch to other overseas banks offering LoUs. The messages are sent through SWIFT — an inter-bank messaging network for securely transmitting instructions for financial transactions.
Samyak Jain
17BAL044
Letter of undertaking (LOU) is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit.
In wake of the massive banking fraud involving collusion of two junior staffers of Punjab National Bank (PNB) with diamantaires Nirav Modi and Mehul Choksi, the practice of issuing letter of undertaking (LoUs) has been in the news ever since. The Nirav Modi-PNB fraud came to light when on January 29, a PNB official from Mumbai filed a criminal complaint with Central Bureau of Investigation (CBI) against 3 companies, Solar Exports, Stellar Diamonds and Diamond R US, and four people, including diamantaire Nirav Modi and Mehul Choksi, the managing director of Gitanjali Gems, saying they had defrauded the bank. The bank alleged two junior employees at the Mumbai branch had helped the companies and people managing them get letters of credit or "letters of undertaking" (LoUs) from it without having a sanctioned credit limit or maintaining funds "on margin".
Central Loan Approval Authority should be established as an umbrella of all banks. This should be the one and only sole organization in-charge of approving all credit facilities.
Letter of undertaking (LOU) is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. For raising the LOU, the customer (importer) is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. Once the letter of credit is acknowledged and accepted, the lender transfers money to the nostro account of the bank that has issued the LoU.
One of the recent example of LoU is a multi-crore fraud involving the Punjab National Bank and Nirav Modi.
Nirav Modi and Mehul Choksi, the practice of issuing letter of undertaking (LoUs) has been in the news ever since. some points of the case to be noted:
1) In Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money.
2) Nostro account is the Punjab National Bank's account held in another bank in a foreign country for the purpose of holding foreign currency.
3) The term of loan was allegedly extended far beyond what is prescribed as per the rule book.
VARTIKA JAIN
17BAL125
letter of undertaking is a letter of credit issued by one bank that paves way for another bank to give money to supplier of Bank's customer. The money is transferred by 2nd bank to supplier of 1st bank customer via a Nostro account that the bank holds in abroad.
The credit is ideally meant for short-term only. it is an interbank provision. The overseas bank lending to the borrower based on the LoU earns interest on the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at a place where she may not have banking relationships. Moreover, interest rates in India are higher compared to international benchmark rates. So the effective outgo on interest for the borrower is also beneficial. If the collateral is in the form of a fixed deposit, there is further gain on the interest earned, while the bank also gets some funds to use.
17bal101
Letter of Undertaking (LOU): There is a widely accepted provision of bank guarantees known as a letter of undertaking (LOU) under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's customer for making payment to its offshore suppliers in the foreign currency.
For raising the LOU, the customer (importer) is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. But in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money.
Once the letter of credit is acknowledged and accepted, the lender (foreign branch of Indian bank) transfers money to the nostro account of the bank that has issued the LoU. In this case, Nostro account is the Punjab National Bank's account held in another bank in a foreign country for the purpose of holding foreign currency.
As a matter of fact, letter of undertaking is a letter of credit issued by one bank (let's call it Punjab National Bank) that paves way for another bank (let's call it Allahabad Bank-AB) to give money to supplier of Punjab National Bank's customer. As mentioned earlier, the money is transferred by AB to supplier of PNB's customer via a nostro account that PNB holds in AB in abroad.
The credit is ideally meant for short-term only. In the Nirav Modi-Mehil Choksi case, the term of loan was allegedly extended far beyond what is prescribed as per the rule book. Even the PNB and other lenders are slugging out over the loan term, which should not have been extended, says PNB, longer than 90 days.
17bal024
An LoU is an assurance given by one bank to another to meet a liability on behalf of a customer.
The LoU is akin to a letter of credit or a guarantee.
LoUs are used in international banking transactions.
An LoU is issued for overseas import remittances and involves four parties — an issuing bank, a receiving bank, an importer and a beneficiary entity overseas.
According to norms, the term of an LoU is 180 days, and can be rolled over once for six months.
Since LoUs are a form of lending, they are typically backed by security.
LoUs are conveyed from bank to bank through Society for Worldwide Interbank Financial Telecommunication (SWIFT) instructions, which pass through a triple layer of checks.
PNB has alleged that two of its employees “fraudulently” issued LoUs and “transmitted SWIFT instructions to the overseas branches of Indian Banks” to raise buyers’ credit for Nirav Modi’s firms, Diamond R US, Solar Exports, and Stellar Diamonds, without making entries in the bank system.
According to PNB’s complaint to CBI, the LoUs were issued for the Hong Kong branches of Allahabad Bank and Axis Bank which have given money to the beneficiary entity on behalf of Modi’s firms. As a result, PNB will have to settle the LoUs with these branches according to the norms of the Hong Kong Monetary Authority.
17bal041
Letter of Undertaking is a bank guarantee under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank.
LoU is sanctioned by one party, such as an independent contractor, describing the scope of work that’s going to be provided.
In Nirav Modi’s case, LoU is a bank guarantee and was issued for overseas payment. By giving LoU, PNB agreed to repay the principal amount and interest on the clients (Nirav Modi) loan unconditionally.
During issuance of LoU, there are four parties involved - issuing bank, receiving bank, importer and beneficiary entity overseas.
In this case, PNB officials apparently used their access to SWIFT messaging system, which is used for overseas transaction. This led into verification guarantees on LoUs without taking necessary sanctions. And overseas branches of Indian banks sanctioned forex credit.
17bal010
LoUs are used by bank's customer to avail short term credit for the smooth flow of transactions with foreign parties to contract.
They are mostly used in business transactions.
Their lies a difference between the government and private sector limit's to transact. Companies other than government or public sector undertaking are allowed USD 5000000 only so as to prevent any fraud in the transactions.
Also,the interest rates of such undertakings in India are higher than foreign this may lead to the benefit of the issuer as he can earn a hefty interest on his debt.But only the authorised dealers are allowed to carry on the transactions as it acts as a check on the inflows and outflows of cash from a country and that there is no misuse of the Nostro account.
17bal060
This instrument was misused by bank officials in a recent case which made the RBI take some strict measures in the handling of LOU.
PNB has accused two junior employees at a Mumbai branch of colluding with companies linked to billionaire jeweller Nirav Modi and his uncle, Mehul Choksi, to obtain fraudulent loans.
The firms of diamond jewellers Nirav Modi and Mehul Choksi allegedly acquired fraudulent letters of undertaking (LoU) from PNB's branch in Mumbai to secure overseas credit from other lenders. The Reserve Bank of India has directed banks to link the SWIFT (Society for World Interbank Financial Telecommunication System platform) which was misused by Nirav Modi at Punjab National bank with the core banking solutions (CBS) of banks by April 30, 2018. While the failure of SWIFT-CBS link led to the Rs 11,400 crore fraud at PNB, many banks are yet to establish the linkage.
Simran Pahwa
17BAL111
LoUs are used by a bank’s customer to avail short-term credit in a foreign country. These transactions are not retail in nature and are mostly used by businesses for import of goods.
The borrower uses his/her existing credit relationship with a bank in India to avail the required credit outside the country. “An authorised dealer may give a guarantee, letter of undertaking or letter of comfort in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India (being an overseas supplier of goods, bank or a financial institution), for import of goods, as permitted under the Foreign Trade Policy…,” the Reserve Bank of India (RBI) had said in its directives for import of goods and services.
Ujjawal Bhargava
17BAL116
, Letter of Undertaking is a bank guarantee under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank.
So, let’s say Nirav Modi, whose diamonds have sparkled on the necklines of Bollywood and Hollywood A-listers, wants to import diamonds for a new collection. He approaches PNB and asks it to arrange for a guarantee in the form of LoU for short-term loans from the foreign branches of Indian banks, to pay his diamond supplier. Bank officials promptly send instructions from PNB’s Mumbai branch to other overseas banks offering LoUs. The messages are sent through SWIFT — an inter-bank messaging network for securely transmitting instructions for financial transactions.
Theoretically, such SWIFT instructions need to be recorded in a bank’s core banking system. But thanks to the connivance of bank officials at PNB, the actual LoUs issued over the past seven years to Nirav Modi managed to escape scrutiny.
These guarantees never figured in the bank’s books. According to the CBI FIR filed by PNB, a total of 153 LOUs were issued in 2017, amounting to a little over ₹3,000 crore.
Why is it important?
LoUs are important instruments that allow those in the import trade to transact their business. As an importer in India cannot simply buy dollars and send it abroad to make payments to his supplier, various instruments such as LoUs and Letters of Credit are required to carry out the transaction. LoUs, which are essentially a form of guarantee, have come to be a far cheaper and convenient way for importer to raise credit. Nirav Modi, for instance, essentially had two options to make the payment to his supplier. One, he borrows money from PNB in rupees, converts it dollars, and pays his supplier, probably a diamond or pearl merchant. But here, the interest rate on such loans would be at the higher domestic rate, say 12-13 per cent.
The other way would be through a bank guarantee offered by PNB. The bank would simply instruct the overseas bank through SWIFT to remit funds into PNB’s overseas account, which is in turn used to pay Modi’s supplier. PNB earns a fee and the overseas bank offering the credit charges an interest at a spread over LIBOR. In effect, Nirav Modi gets a cheap line of credit.
So where does the fraud come in? In theory, having used the imported diamonds to fashion jewellery, Modi should have sold his wares and raised cash to settle the dues against LoUs. In this case though, the loan was not paid back by Nirav Modi at all. By repeatedly rolling over the loan, he ensured that new LoUs were used to repay earlier LoUs. So, there had been no default till now
Abhinav silakari
17bal002
A simple reading of these rules suggests that some or all of these have been violated in the Nirav Modi scam.
Some questions that arise are
1. Was there any approval by RBI? IF Yes,how much was the detailed investigation by RBI
2. Did PNB adhere to the 500,000 limit?
The story begins like this:
The Indian Bank offered loans to Nirav Modi say at about 10%
Now thats too much. NM thought of foreign loan I.e. LIBOR + 2% = 3.5% Approx
Now NM had asked PNB to become gurantator for this loan. However, differing from normal cases, PNB did not take any collateral for this.
Here is where the scam began.
PNB then sends a msg to foreign bank via SWIFT and since they recognize PNB and not NM they transferred money to pnb in its nostro account.
NM must have paid this money to PNB, but that does not happen as some manager was commissioned well for whole of this transaction and numerous other LoUs misusing SWIFT.
The scam was realized when the bank had nothing but not in use (2018) LoUs worth 11,500 Crore.
Was the statem of SWIFT inefficient?
Were Banks and RBI aware of the loopholes of LoUs?
Did PNB follow the rules and more over did the executive did the same?
As Harshad Mehta scam, it led to modification of Sebi guidelines, although the nation will pay a huge price for it, this is certainly going to wake up RBI and Ministry of Finance and in turn the Banks.
Palak Jain
17bal034
There is a provision of bank guarantee known as a letter of undertaking (LOU) under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee.
However, to be able to raise the LOU, the customer is supposed to pay margin money to the bank issuing the LOU and accordingly, he is granted a credit limit. But in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money, reported Reuters.
Nirav Modi, via his three firms, Diamond R Us, Solar Exports and Stellar Diamonds, managed to pay to its suppliers of rough stones on a regular basis. The payment was made through the loans by banks including Axis Bank, UCO Bank (Rs 2,636 crore) and Allahabad Bank (around Rs 2,000 crore). The loans were raised by Nirav Modi's firms on showing the letters of undertakings issued by the PNB.
Incidentally, there was no official record of such letters of undertaking in the PNB records as the bank discovered early this year before reporting the matter to the CBI.
Ideally, Nirav Modi and his firms are supposed to repay the loans but so far, all these loans have allegedly been rolled over for want of funds. In the scenario when the borrower fails to make the repayment, the bank issuing the LOU (PNB in this case) is duty-bound to honour the commitments on the behalf of its customers.
So in effect, Indian bank's foreign branches make payment to Nirav Modi's suppliers in the form of loans to Modi. As guarantee, the firms show the letters of undertaking issued by the PNB's Brady Road branch in Mumbai.
In January, the fraud was unearthed when Modi's firm requested further LOUs for paying the overseas suppliers. On this, the bank officials refused on the ground that Modi's firm need to keep 100% collateral for the same. The Modi's firm argued that no such money was kept 'on margin' in the past either. Following which, the bank officials scanned the records only to discover that there was no trace of any such transaction. This implies that the guarantees/ undertakings were issued by bypassing the rules in collusion with some PNB employees.
The violation of banking rules as mentioned in the point 8 above was too glaring a blunder to ignore. Hence, Punjab National Bank filed a criminal complaint with the CBI on January 29 accusing Nirav Modi and others of defrauding the bank and causing it a loss of Rs 280 crore ($43.8 million). The complaint was filed against three companies and four people, including Nirav Modi and Mehul Choksi, managing director of Gitanjali Gems.
"We will get back to normalcy within six months. Bank has the size and capacity to come out of the problem," Sunil Mehta, Managing Director and Chief Executive Officer of Punjab National Bank. told a investors' conference call on Friday. The bank was going through some problems but "we will fix it," he added.
The Reserve Bank of India (RBI), meanwhile, said on Friday it has undertaken a supervisory assessment of control systems at Punjab National Bank and will take "appropriate supervisory action".
Though it has been promised by the RBI and various officials that competent action will be taken. But these frauds in our country show that the finance and banking system is susceptible to the termites present and there is a need for proper mechanism to lash out these termites . Until the same is achieved any sort of mishap as far as our economy and banking sector is concerned is more prone to happen.
17bal033
Letters of Undertakings or LoUs are a form of lending issued by one bank to the overseas branches of other Indian banks as an assurance to meet a liability on customer’s behalf. Four parties are involved in an LoU namely issuing bank, a receiving bank, an importer and a beneficiary entity situated overseas. LoUs, which represent the bank’s consent, are backed by some security. The present norms by the Reserve Bank of India (RBI) have specified the LoU term to be 180 days. An LoU can be rolled over once for a six month period. These letters are cleared using SWIFT instructions from bank to bank after passing through rigorous three-layered checking mechanism comprising a maker, a checker and a verifier before it’s sent across.
For Example, In case of buyers Credit LOU is issued by Importers Local Bank to overseas Bank Branch and on the basis of such LOU the overseas bank funds the Importer by either directly making payment to the supplier or by transferring funds to Local bank Account.
In the case of Nirav Modi he used fake Lou's with the help of indsider officials. The securities provided for backup were fraudulent. The bank even exceeded the limit prescribed by RBI. He also fraudulently misused the rule of validity of LoU for six months. Thus these scam happened even after so much regulations by RBI.
17BAL043
Sajjan Singh Chouhan
Letter of Undertaking is a bank guarantee under which a bank allows its customer to raise money from another Indian bank’s foreign branch in the form of short-term credit. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank.as disscussed lets see nirav modi's case the most hot topic How did the scam come to light?In January, when a couple of LoUs matured but the banks did not receive their payments, they approached PNB for repayment of the loans. Also, one fraudulent LoU was issued on January 16, 2018, for and on behalf of Modi's firms. The bank officials asked the firms to submit 100% cash margin for the LoU, to which the firms said that they had availed similar facility in the past. An internal inquiry by PNB found that fake LoUs were issued, opening the can of worms. When neerav approached PNB for overseas loan the Bank officials promptly send instructions from PNB’s Mumbai branch to other overseas banks offering LoUs. The messages are sent through SWIFT — an inter-bank messaging network for securely transmitting instructions for financial transactions.such SWIFT instructions need to be recorded in a bank’s core banking system. Bit due to malpractices and corrupt officials it didnt happen the way it should.Now the question comes why should we care about it how does it afeects us. So for that matter you should knw that Banks, supposed custodians of public money, have been making headlines for all the wrong reasons.The Nirav-PNB scam has only brought to light another festering issue within PSU banks — absolute failure of control systems and governance structure. Its an issue which has to be delt as soon as possible for less fraudulent and a secured financial system to be established in india.
Letter of Undertaking or LoU is a guarantee given by one bank to another bank to repay a loan on behalf of a client.
It is generally used when a person imports something from a person in another country.
Let’s say A from Mumbai imports something worth Rs.10000 from B living in HongKong
A will have to make payment of Rs.10000 to B.
So A will go his bank in Mumbai (Punjab National Bank) to get an LOU worth Rs.10000issued in favour of a bank in Hongkong (Allahabad Bank’s branch in the Hongkong).
PNB will convey this to Allahabad Bank.
Allahabad bank will immediately transfer Rs.10000 to a Nostro account. (Nostro account is an account held by an Indian Bank (PNB) with a foreign bank, Allahabad Bank in this case.)
Rs.1000 is effectively a loan given to A by Allahabad Bank and guaranteed by PNB.
A can use it to pay B.
If A receives the goods, he will have to pay PNB. PNB will pay Allahabad Bank.
PNB is giving a guarantee to Allahabad bank that loan will be repaid even if A defaults.
Reference :
698 Views · · Answer requested by
A Letter Of Undertaking, or LOU is a document issued by a bank to a person or a firm. This LOU is generally used for international transactions and is issued keeping in mind the credit history of the party concerned. The party can then avail Buyer's Credit against this LOU from a foreign bank.
Let us take an example. Ravi is a businessman who wants to buy some raw materials from XYZ company which is in Hong Kong. Now, this XYZ company has to be paid through a Hong Kong bank, and Ravi doesn't have any account in any Hong Kong bank. But Ravi has an account in SBI in India. So Ravi approaches SBI and asks for a LOU. Ravi can then show this LOU to a bank in Hong Kong and get Buyer's Credit from that bank, which he then uses to pay XYZ company.
So, in other terms, LOU is like a guarantee or assurance from SBI to the bank in Hong Kong, that if things go south, and Ravi doesn't settle his credit, SBI will settle it.
Now, SBI would give the LOU after great background checks and credit history of Ravi, and would charge higher interest on this
Prakhar dixit
17bal039
Letter of Undertaking or LoU is a guarantee given by one bank to another bank to repay a loan on behalf of a client.
It is generally used when a person imports something from a person in another country.
Let’s say A from Mumbai imports something worth Rs.10000 from B living in HongKong
A will have to make payment of Rs.10000 to B.
So A will go his bank in Mumbai (Punjab National Bank) to get an LOU worth Rs.10000issued in favour of a bank in Hongkong (Allahabad Bank’s branch in the Hongkong).
PNB will convey this to Allahabad Bank.
Allahabad bank will immediately transfer Rs.10000 to a Nostro account. (Nostro account is an account held by an Indian Bank (PNB) with a foreign bank, Allahabad Bank in this case.)
Rs.1000 is effectively a loan given to A by Allahabad Bank and guaranteed by PNB.
A can use it to pay B.
If A receives the goods, he will have to pay PNB. PNB will pay Allahabad Bank.
PNB is giving a guarantee to Allahabad bank that loan will be repaid even if A defaults.
Reference :
A Letter Of Undertaking, or LOU is a document issued by a bank to a person or a firm. This LOU is generally used for international transactions and is issued keeping in mind the credit history of the party concerned. The party can then avail Buyer's Credit against this LOU from a foreign bank.
Let us take an example. Ravi is a businessman who wants to buy some raw materials from XYZ company which is in Hong Kong. Now, this XYZ company has to be paid through a Hong Kong bank, and Ravi doesn't have any account in any Hong Kong bank. But Ravi has an account in SBI in India. So Ravi approaches SBI and asks for a LOU. Ravi can then show this LOU to a bank in Hong Kong and get Buyer's Credit from that bank, which he then uses to pay XYZ company.
So, in other terms, LOU is like a guarantee or assurance from SBI to the bank in Hong Kong, that if things go south, and Ravi doesn't settle his credit, SBI will settle it.
Now, SBI would give the LOU after great background checks and credit history of Ravi, and would charge higher interest on this
17bal039
Prakhar dixit
LOU which stands for letter of understanding is one of the most important document in the banking system, not only in india but world wide
Here a bank issues this letter after considering various asseta of an individual or company. Thus acts as a guarantee that a bank trusts the individual or company therefore it will have some substance in it and therefore they do not need to conduct any kind of assets revaluation or other types of book works and banks can simply move to Give loans against the certificate.
It is also connected to SWIFT system which works as a messenger system, this system is considered highly safe and secured.
LoU was an important instrument which now under the allegation of being highly unsafe and with probability of corruption after the PNB scam.
With many bankers in support and against it lets see whether banks gonna support it further or not.
NIKUNJ MAHESHWARI
17BAL093
LoU is an undertaking provided by one bank to another bank, in favour of or on behalf of a customer. Not being retail in nature, they are mostly used in business for import/export purposes. The borrower uses its existing credit relationship with a bank in India to avail the required credit outside the country. “An authorised dealer may give a guarantee, letter of undertaking in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India, for import of goods, as permitted under the Foreign Trade Policy. Reserve Bank of India (RBI) had said in its directives for import of goods and services.
If you are a customer of any Indian bank wanting to avail money for let's say, release of goods, you may approach the banks oversees branch and ask for the money in the currency you need it in. For that, a Letter of Undertaking would be availed by the bank to you, but according to RBI, it is based on one's Credit relationship with the bank. The bank may ask for the collateral which could be of 100 per cent or even more or less or merely on the basis of Credit Score. If the bank is convinced it issues LoU resulting in the release of amount. But important thing is that the amount will be transferred to the account of the individual in the bank back at home. The amount is released in the account nanmed as Nostro Account. You may then decide in whose favour you want to transfer the money.The overseas bank lending to the borrower based on the LoU earns interest on the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at a place where she may not have banking relationships. Moreover, interest rates in India are higher compared to international benchmark rates. So the effective outgo on interest for the borrower is also beneficial. If the collateral is in the form of a fixed deposit, there is further gain on the interest earned, while the bank also gets some funds to use.
The MArgin money and the Credit Limit, neither of them was given by Nirav Modi, a diamond tycoon of India who is currently under cognizance for the fraud he committed.
The overseas bank lending to the borrower based on the LoU earns interest on the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at a place where she may not have banking relationships. Moreover, interest rates in India are higher compared to international benchmark rates. So the effective outgo on interest for the borrower is also beneficial. If the collateral is in the form of a fixed deposit, there is further gain on the interest earned, while the bank also gets some funds to use.
17BAL003
Letters of undertaking are issued by the banks as a guarantee, as an 'undertaking' that the amount of loan will be returned. it is being manipulated by the people who take loans in very large amount. They bribe the bank official instead of the guarantee of payment. This has happened in the Nirav Modi case. Nirav Modi and his companies obtained loans based on allegedly fraudulent guarantees issued by some of the employees of the branch, according to the first information report filed by the CBI. The Central Bureau of Investigation arrested MK Sharma, the internal chief auditor of Punjab National Bank, in the Rs 12,700-crore fraud. Still new relevations are getting disclosed.
Abhilekh Tiwari
17bal066
This information about LoUS puts up many questions on financial surveillance and bad implementation of rules and regulations on GOVT. banks. we do have checks in our banking sector but no body really cares.taking example of nirav modi case If a branch-level official does a transaction of this manner for a period of seven years, it can get caught at different levels if any of the checks in place triggered this illegal activity. or instance, the SWIFT messaging platform that was used by the perpetrators in the PNB case is subjected to a daily check by the branch manager, which is compulsory in any bank.Even if one imagines that this part failed, the branch manager has to do a daily tally of income and expenditure in the branch while one of the officers combs through the books to look for suspicious transactions. "Besides these daily checks, the bank does concurrent audit which happens concurrently throughout the year. Such fraud should have reflected there," the official said. This apart, there are RBI and government representatives on the boards of large banks who are supposed to keep an eye on all transactions and ensure that nothing goes amiss. and in this SWIFT no. is also same for 7 consecutive years which originally changes in each transaction.
But this shows that all of them were sleeping while this fraud was taking place and pressure to business top level officials often turn blind to illegal business activities.
This put up one more one more question against us that a prior permission is also require of finance ministry as written above so how they are able to get LoUs from bank. is our finance ministry officials, IAS officers were sleeping or they are with them or neglecting the whole scenario. who is questionable and liable for this fraud. well this is a big question mark on our financial, judicial,executive, administrative and intelligence system and framework.
2 more question marks also aroused recently that Rs 5,280 also not paid by mehul chauksi of gitanjali group taken from consortium of 31 banks and RBI also skipped the audit of PNB for 9 years which are good enough to forget any case.
An Letter of Undertaking (LoU) is simply a request made to another bank in the SWIFT( Society for Worldwide Interbank Financial Telecommunication) network to loan money to a client. The bank that issues the LoU essentially guarantees the bank that receives the LoU request that is stands by the creditworthiness of the borrower. That in case of default, the bank that issued the LoU stands liable to compensate the bank that made the loan to the borrower.
LoU is important as an importer in India cannot simply buy dollars and send it abroad to make payments to his suppliers.
In the PNB fraud case PNB officials allegedly used their access to SWIFT messaging system and verified guarantees given on LoUs without taking necessary sanctions. As a result, overseas branches of many Indian banks gave forex credits. PNB issued 150 LoUs for transfer of money to Nirav Modi's firms, using which the billionaire jeweller managed to secure money in foreign accounts.
Instances like this shake up our faith in the system. Banks are supposed to be custodians of public money, have been making headlines for wrong reasons. The Nirav-PNB scam has only brought in light another issue with PSU banks- absolute failure of control systems and governance structure. And this time, auditors and even the RBI are answerable.
We need to ascertain how internal controls came to violated. One reason is said to be that the SWIFT was not linked to core banking software. After this RBI instructed banks to link CBS with SWIFT system. Earlier to this their was no guideline which compelled Banks to links these two.
Hence, RBI regulations should be more specific and strong on LoUs.
LoU is an undertaking provided by one bank to another bank, in favour of or on behalf of a customer.LoUs are used by a bank’s customer to avail short-term credit in a foreign country. These transactions are not retail in nature and are mostly used by businesses for import of goods.The overseas bank lending to the borrower based on the LoU earns interest on the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at a place where she may not have banking relationships. Moreover, interest rates in India are higher compared to international benchmark rates. So the effective outgo on interest for the borrower is also beneficial. If the collateral is in the form of a fixed deposit, there is further gain on the interest earned, while the bank also gets some funds to use.A set of bank officials in connivance with businesses owned by flamboyant diamond and jewellery merchant Nirav Modi exploited information gaps and lax processes in India's second largest PSU bank, Punjab National Bank, to defraud it of money that may add up to $1.77 billion, or Rs 11,345 crore. Nirav modi exploited the information gap present in PNB and used instrument like LoU to earn profits. RBI should make strong rules and regulations on LoUs to curb such type of fraudulent activities.
Suyash Vijayvergiya
17BAL054
LOUs are letters of understanding. They are formal text which contains the detailed summary of any work, task of receiver/service provider, important events related to the work to be done, goals which have been achieved already. LOUs are considered as guarantee for overseas lenders to give money to an Indian importer.
In recent case of Nirav Modi fraudulent LOUs were issued Punjab National Bank worth of Rs. 11400 crores. 3 foreign banks – Axis bank, Allahabad bank and Union bank of India provided credit to Nirav modi based on LOUs on Punjab National Bank.
There was no return of money from Nirav Modi and so the burden of non-payment falls on Punjab National Bank and not 3 banks as LOU is a financial guarantee in cases of non-payment by importer.
RBI laid down guidelines for issuing of LOUs
Primarily, the guidelines insist that the importer should have good track record.
Secondly, the RBI regulation says that it is the responsibility of the bank to undertake the commercial risk involved – “banks should, undertake the transaction based on their commercial judgment and after being satisfied about the bonafides of the transaction.”
The RBI also gives instructions on KYC norms and other documents to be submitted by the importer to the bank.
RBI guidelines should be made more strong and specific because when credible importer like Nirav Modi defaults, banks get into troubles.
YASH DADHICH
17BAL120
A Letter Of Undertaking, or LOU is a document issued by a bank to a person or a firm. This LOU is generally used for international transactions and is issued keeping in mind the credit history of the party concerned. The party can then avail Buyer's Credit against this LOU from a foreign bank.
Let us take an example. Ravi is a businessman who wants to buy some raw materials from XYZ company which is in Hong Kong. Now, this XYZ company has to be paid through a Hong Kong bank, and Ravi doesn't have any account in any Hong Kong bank. But Ravi has an account in SBI in India. So Ravi approaches SBI and asks for a LOU. Ravi can then show this LOU to a bank in Hong Kong and get Buyer's Credit from that bank, which he then uses to pay XYZ company.
So, in other terms, LOU is like a guarantee or assurance from SBI to the bank in Hong Kong, that if things go south, and Ravi doesn't settle his credit, SBI will settle it.
Now, SBI would give the LOU after great background checks and credit history of Ravi, and would charge higher interest on this.
Ashok Kumar
17BAL013
Letter of Undertaking (LOU): There is a widely accepted provision of bank guarantees known as a letter of undertaking (LOU) under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's customer for making payment to its offshore suppliers in the foreign currency.
For raising the LOU, the customer (importer) is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. But in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money.
Once the letter of credit is acknowledged and accepted, the lender (foreign branch of Indian bank) transfers money to the nostro account of the bank that has issued the LoU. In this case, Nostro account is the Punjab National Bank's account held in another bank in a foreign country for the purpose of holding foreign currency.
As a matter of fact, letter of undertaking is a letter of credit issued by one bank (let's call it Punjab National Bank) that paves way for another bank (let's call it Allahabad Bank-AB) to give money to supplier of Punjab National Bank's customer. As mentioned earlier, the money is transferred by AB to supplier of PNB's customer via a nostro account that PNB holds in AB in abroad.
The credit is ideally meant for short-term only. In the Nirav Modi-Mehil Choksi case, the term of loan was allegedly extended far beyond what is prescribed as per the rule book. Even the PNB and other lenders are slugging out over the loan term, which should not have been extended, says PNB, longer than 90 days.
Dolly Balana
17bal124
A Letter of Understanding is a guarantee given by a bank, under which a bank allows its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. This guarantee makes it convenient to make payments to foreign trade partners on time, thus making trade and its activities more efficient.
However, in order to raise the LOU, a customer is mandatorily required to pay margin money to the bank issuing the LOU and accordingly, he is granted a credit limit.
The reason why LOUs have become a topic of discussion is the recent revelations of the irregularities found in PNB which issued undertakings or guarantees bypassing the rules. As in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money.The Rs 11,300 crore came to light only after PNB employee Gokulnth Shetty, who had allegedly colluded with Nirav Modi in procuring fake letters of undertaking (LOUs), retired recently.
Looking at the huge amount of money ,i.e., ₹11,300 crore, we can easily understand that there are serious loopholes in the banking sector even today. These loopholes are exploited by big corporate houses and the entire public money is flushed out of the system in one go. RBI should take responsibility of such fraudulent activities as it is the regulator of all banks in India. LOU is one way of doing it, there can be many other ways too which haven't seen the daylight. So, the RBI should immediately analyze and review all such provisons of bank guarantee along with its implementation by all banks in order to identify and rectify all such loopholes that exist in the system. There have been such incidents in the past too, like Vijay Mallya's Kingfisher case and many others which have made a complete mockery of the banking system and have shook the faith of investors in the banking system.
Hence, the RBI shall take stringent exemplary actions against PNB, if it is proved guilty, and similarly be on its toes to constantly ensure that no such scam happens in future.
Aadesh Shinde
17BAL061
Letter of Understanding is issued by the bank as a guarantee to do the overseas trading. In other words LoUs mainly allow its customers to raise money from another Indian bank's foreign branch in the form of short term credit and guarantee for a banks customer for making payment to its offshore suppliers in the foreign country. The validity of procedure of issuing LOU came into question after the scam of nirav modi. It is being said that Punjab National Bank's employee gave LOU to nirav modi without fixing any credit limit or without taking any pre-required money or assets, which they should in general scenario. It is the case of Punjab National Bank, defrauded with money that may add up to Rs 11,345 crore. Nirav modi exploited the information gap present in PNB and used instrument like LoU to earn profits. RBI should make strong rules and regulations on LoUs to curb such type of fraudulent activities in further.
LoUs are used by a bank’s customer to avail short-term credit in a foreign country. These transactions are not retail in nature and are mostly used by businesses for import of goods.
It has many advantages like The overseas bank which is lending to the borrower based on the LoU earns interest on the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at a place where she may not have banking relationships. Also, international benchmark rates are less than the rates in India so the effective outgo on interest for the borrower is also beneficial. If the collateral is in the form of a fixed deposit, there is further gain on the interest earned, while the bank also gets some funds to use.
But the recent case of Nirav Modi clearly shows that how the concept of LOU has so many loopholes which is ultimately making our country's economy hollow and how the need to have more strict policies.
17BAL070
Letter of undertaking (LOU) is a bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. The LOU serves the purpose of a bank guarantee for a bank's customer for making payment to its offshore suppliers in the foreign currency.
A letter of undertaking is a service whereby the bank guarantees a customer's payment obligation, of a specified amount, to a third party, in accordance with terms and conditions stipulated in a contract.
The contract or agreement depends on the completion of that undertaking.
An Authorised Dealer is a bank which has been authorised by the Central Bank to deal in gold and all foreign currencies, and for this purpose, can open and maintain accounts in such currencies within the limits established by the Bank. Under authority delegated by the Central Bank, an authorised dealer can approve certain applications for foreign currency within specified limits. They can offer banking services to resident and non-resident clients.
Recently, PNB revealed that fraudulent transactions by billionaire jeweller Nirav Modi and related entities amounted to $1.77 billion or over Rs 11,000 crore.
In a complaint to the Central Bureau of Investigation, the bank said that Modi and the companies linked to him colluded with its officials to get guarantees or Letters of Undertaking to help fund buyer’s credit from other overseas banks. The funds, ostensibly raised for the purchase and sale of diamonds, were not used for that purpose, PNB alleged.
Later, it was revealed that the fraud extended past PNB to other lenders like State Bank of India, Union Bank, Axis Bank Ltd. and Allahabad Bank, all of whom had exposure to case.
Thus issuing the letter of undertaking has various loopholes and so strict policies are required.
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Firstly the two instruments mentioned are Letter of Undertaking and Letter of Comfort. The difference between the two is that Letter of undertaking is inter-bank and Letter of Comfort of is by Parent company branch to it's Foreign partner/subsidiary branch.
These are both instruments giving 'bank guarantees' that are useful for short-term fund raising when overseas trading is done in a different currency.
The mentioned Section B here governs Issue of Guarantees by an Authorized Dealer. An Authorized Dealer is actually defined as any 'bank' which has authority from the central bank of the country to deal in gold, foreign currencies and have the authority to offer their services to residents and non- residents both.
Therefore these Authorized Dealers also have the authority as given under section B(8), (1),(2) and (3) to provide for the goods or services imported by residents or non- resident from a foreign country under given guidelines regulated by RBI.
These LoUs are a hot topic presently due to the famous Nirav Modi, PNB scam. What Mr.Modi did was pay old LoUs with the new ones and this shows the foolishness and loopholes in the system and raises a lot of fingers on PNB.
Also it is a matter of high concern because LoUs are very important and useful instruments of encouraging and enabling smooth foreign trade.
When guarantee is taken by the bank for overseas import payments by issuing a letter then it is known as Letter of Undertaking. While issuing LoUs for a client, bank agrees to repay the principal and interest on the client's loan without any condition. The loan is used to make payment to the customer’s offshore suppliers in foreign currency. The overseas bank usually lends to the importer based on the LoU issued by the importer’s bank on trust basis.The overseas bank lending to the borrower based on the LoU earns interest on the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at a place where it may not have banking relationships.
The Punjab National Bank’s Brady House Branch in Mumbai issued fraudulent letter of undertaking (LoU) worth of Rs 11400 crores in favour of Nirav Modi’s firms (trader of diamonds). His firms sought the LoU to get buyers’ credit from foreign banks so that they can finance diamond imports to India.Initial report from PNB indicate that the LoU was issued without proper authorisation. The importer is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. But in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money.RBI guidelines should be made more strict and specific because when importers like Nirav Modi do such fraud, banks get into trouble.
APEKSHA JOSHI
17BAL076
LoUs are used by a bank’s customer to avail short-term credit in a foreign country. These transactions are not retail in nature and are mostly used by businesses for import of goods.
The borrower uses his/her existing credit relationship with a bank in India to avail the required credit outside the country. “An authorised dealer may give a guarantee, letter of undertaking or letter of comfort in respect of any debt, obligation or other liability incurred by a person resident in India and owned to a person resident outside India (being an overseas supplier of goods, bank or a financial institution), for import of goods, as permitted under the Foreign Trade Policy…,” the Reserve Bank of India (RBI) had said in its directives for import of goods and services.
Samar Pratap
(17bal105)
LoU or letter of undertaking is an undertaking provided by one bank to another bank, in favour of or on behalf of a customer.The question is,who get an LOU.An LoU is used by a bank’s customer to avail short-term credit in a foreign country. These transactions are not retail in nature and are mostly used by businesses for import of goods.To understand LOU let us take the example of PNB.The Punjab National Bank’s Brady House Branch in Mumbai issued fraudulent letter of undertaking (LoU) worth of Rs 11400 crores in favour of Nirav Modi’s firms (trader of diamonds). His firms sought the LoU to get buyers’ credit from foreign banks so that they can finance diamond imports to India.Initial report from PNB indicate that the LoU was issued without proper authorisation. The importer is supposed to pay margin money to the bank that issues the LOU and accordingly, they are granted a credit limit. But in Nirav Modi's case, neither was there a credit limit, nor did he ever give any margin money.RBI guidelines should be made more strict and specific because when importers like Nirav Modi do such fraud, banks get into trouble.
Syed Fahad Saeed
17bal113
When there is matter of international trade here comes the concept of Letter of Understanding, because in any international stuff two parties who are dealing usually don’t meet each other face-to-face, therefore, they are suspicious that what will they do if one party sends the commodity and other will not pay for it or if one side pay and others don’t send the items.
For Such condition bank and bankers come into the Picture. Here if we talk about the recent case of Nirav Modi here he sends a letter of understanding through PNB to a foreign bank on behalf of Nirav Modi and the process of the transaction is done between the banks by SWIFT. The LoU were found fraud this did not happen first time over 150 such LoUs were issued sine 2011.The most interesting fact is that LoU expires in 90-180 days but for discovering this fraud it took 7 years.
Sarthak Chauhan
17BAL045
NiMo was the son of PuNaB, a well-known person of the locality where he stayed in.
NiMo loved eating ice-creams and chocolates.
Because he was a kid, he didn't have enough money to buy them and whenever he wishes.
He goes to the the shop and buys ice-cream and chocolates saying he would pay the money later. He also assures if he didn't, then his dad PuNaB would definitely do.
Since the shop keepers knew well about NiMo's dad, they gave ice-cream and chocolates as without taking money.
NiMo's debt was raising like anything.
Shopkeepers, on one fine day, go to PuNaB and casually ask to make payment of NiMo's bills.
PuNaB is completely unaware of his son NiMo's activities and is now in shock.
NiMo has now run away from home because he saw when shopkeepers were entering NiMo's home to ask money from his father PuNaB.
PuNaB is now searching for NiMo.
NiMo - Nirav Modi.
PuNaB - Punjab National Bank.
Shopkeepers - Axis Bank and Allahabad Bank
17BAL028
Letter of undertaking (LOU) is a form of bank guarantee under which a bank can allow its customer to raise money from another Indian bank's foreign branch in the form of a short term credit.
In wake of the massive banking fraud involving collusion of two junior staffers of Punjab National Bank (PNB) with diamantaires Nirav Modi and Mehul Choksi, the practice of issuing letter of undertaking (LoUs) has been in the news ever since. The Nirav Modi-PNB fraud came to light when on January 29, a PNB official from Mumbai filed a criminal complaint with Central Bureau of Investigation (CBI) against 3 companies, Solar Exports, Stellar Diamonds and Diamond R US, and four people, including diamantaire Nirav Modi and Mehul Choksi, the managing director of Gitanjali Gems, saying they had defrauded the bank. The bank alleged two junior employees at the Mumbai branch had helped the companies and people managing them get letters of credit or "letters of undertaking" (LoUs) from it without having a sanctioned credit limit or maintaining funds "on margin".
Central Loan Approval Authority should be established as an umbrella of all banks. This should be the one and only sole organization in-charge of approving all credit facilities.
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Palak Gupta
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