RBI also barred lenders from issuing letters of comfort (LoC) as trade credit for importing goods into India with immediate effect.
In the case of letters of credit and bank guarantees, domestic banks issue these in favour of the exporter, or seller's, 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.
The RBI's action comes almost a month after PNB announced that it had detected fraudulent and unauthorised transactions at its Brady House branch in Mumbai.
Companies linked to Modi and his uncle Mehul Choksi defrauded PNB to the tune of Rs 13,600 crore. The CBI has in its two FIRs filed on the PNB scam accused that fake LoUs were issued without keeping any margin money as security. A letter of credit, on the other hand, is used to establish the credit worthiness of the buyer in the purchase of goods. LOUs are issued only after a bank ensures that the customer has sufficient funds or assets to recover the amount of foreign exchange withdrawn overseas, and it comes with a credit limit and a charge is levied for the service.
The report quotes PNB General Manager Ashwini Vats who wrote in a response to Modi, saying, "You are aware of the amount of fraud committed by you and yet you propose to pay a paltry amount with no proposal or ability to pay the remaining amount". These firms raised short-term credit from overseas branches of other Indian banks based on these LoUs. That apart, it provided the LoU-issuing bank with a source of fee income. "Banks are now exploring alternative instruments like bank guarantees which are typically used as a guarantee to raise loans from other banks", an official with a private sector bank said, requesting anonymity.
As per the investigation, three companies owned by Nirav Modi with the connivance of the Bank Officials got LOUs issued was totally in violation of rules. The payment can also be made directly to the importer.
"On 29 January 2018 (26 to 28 January being public holidays), fraud was reported to RBI and complaint lodged with CBI Mumbai", he said.