Public sector banks on Thursday said that all letters of undertaking (LoUs) have been verified by them and there are no more unauthorised or fraudulent LoUs in the banking system.

The review, which was part of a three-day workshop by public sector banks on risk management, comes soon after Punjab National Bank reported fraudulent transactions of ₹12,968 crore through LoUs by jewellery designer Nirav Modi and his uncle Mehul Choksi.

Terming it a one-off incident amongst 5,000 branches dealing in foreign exchange in the entire banking system in India, MS Sastry, Deputy Managing Director, State Bank of India, said: “Each bank has already scanned their LoU and Letter of Credit-related transactions and have confirmed during the workshop that all of them are properly assessed, genuine and accounted for except those already reported.”

The Mumbai branch of Punjab National Bank had issued as many as 1,213 fraudulent LoUs for the group of companies belonging to Nirav Modi since March 2011. Sastry further said banks want PNB to honour its commitments for LoUs allegedly issued by it to Nirav Modi and its associates. However, the exact liability would be known after completion of investigation.

“They were all issued by PNB and against that we have made payment,” he said.

Meanwhile, PNB Executive Director Sanjiv Sharan said the matter is under investigation. “So it cannot be inferred right now. We are on the job,” he said.

Could raise costs

Addressing newspersons after the workshop, Sastry said the decision by the Reserve Bank of India to discontinue LoUs could raise the cost of capital. However, businesses could still use other forms for financing and it would not impact credit for any sector.

“The LC and BG (bank guarantee) will make trade finance slightly costlier but it is an accepted instrument worldwide,” Sastry said.

More controls in place

He further said that more controls have been put in place, including an additional layer of approval for all outward SWIFT messages, integration of SWIFT with Core Banking Solutions latest by April 30, and time restrictions for such transactions.

Banks will implement all these changes within the next three to six months after taking approval from their respective boards.

As part of the risk-management strategy, state-run lenders have also decided that multiple banking arrangements would be discouraged for borrowers with an exposure of ₹250 crore. Promoters will also have to bring in equity upfront.

The banks have also decided to work on cyber-risk management to tackle any cyber security issues.

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