Modi is said to have defrauded Punjab National Bank, India's second largest state-run bank, of 1.8 billion USA dollars, though he said that he owed the bank only 775 million US dollars, in a letter sent to the bank's management. Choksi and his nephew Nirav Modi, who is the other accused kingpin in the case, have both denied any wrongdoing.
"It has been chose to discontinue the practice of issuance of LoU/LOCs for trade credits for imports into India by AD category banks with immediate effect", the RBI said in a circular. It said banks could continue issuing credit guarantees in the forms of letters of credits and bank guarantees, however, if certain parameters were met.
The move is likely to lead to a freeze in trade financing activities in India, increasing costs for importers who have relied on these instruments to get cheaper overseas credit to pay suppliers.
Bankers said letters of credit involved more paperwork and the due diligence was more stringent than letters of undertaking.
Companies belonging to Modi and Choksi allegedly colluded with employees of Punjab National Banks Brady House branch in Mumbai to obtain fraudulent LoUs, without providing any margin money as security. A lawyer for Gitanjali group's head, Mehul Choksi, said he was unaware of the new allegations and declined to comment, the Reuters report said.
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Choksi, the chairman of the Gitanjali Group, was so far accused along with his nephew Nirav Modi in over Rs 12,630 crore PNB bank fraud.
"We say that a criminal conspiracy has been hatched and the Punjab National Bank has been cheated to the tune of Rs 321.88 crore by Shri Nirav Modi.", he added. Banks have been increasingly finding it hard to trace persons who dupe them and flee the country. "In the case of PNB, it looks like bank officials issued these instruments without proper credit assessment", said R. Gandhi, a former deputy governor of RBI. The importer would negotiate the right price for these loans from the foreign branches of other Indian banks and then get these letters issued by a domestic bank.
Banking sources, however, said such an agreement was not yet a done deal. "The agency will start calling senior executives in these banks as it investigates the credit limit case", said the executive.
State bank shares rose on Tuesday after an easing in retail inflation allayed fears of a central bank interest rate increase in the near term, with the sector index gaining 2.3 percent.