MUMBAI: India’s central bank 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.

In what has been dubbed the biggest fraud in India’s banking history, Punjab National (PNB), the country’s second-biggest state-run bank, said last month it had been defrauded of about $2 billion.

The bank has accused two jewellery groups - one controlled by diamond tycoon Nirav Modi and the other by his uncle, Mehul Choksi – of colluding with rogue bank employees to secure credit from overseas branches of Indian banks using fraudulently issued guarantees largely in the form of letters of undertaking.

Both Modi and Choksi have denied any wrongdoing. Police say they left India in January, before the initial complaint was filed, and their whereabouts are unknown.

In a notice posted on its website, the Reserve Bank of India said banks would have to stop issuing letters of undertaking and letters of comfort, with immediate effect. 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 instruments are all forms of trade finance often used by importers to fund their overseas purchases.

Bankers said letters of credit involved more paperwork and the due diligence was more stringent than letters of undertaking. Officials with direct knowledge also said letters of credit have more international acceptability, while letters of undertaking were mostly used between Indian banks.

BIGGER HIT: In a court filing on Tuesday, police said PNB had filed a new complaint alleging it had been defrauded of an additional 9.42bn rupees ($145m) by the Gitanjali group of jewellery companies, taking the total amount allegedly defrauded by Choksi’s group to 70.8bn rupees ($1.09bn).

Tuesday’s disclosure takes PNB’s overall exposure in the still unravelling fraud case to well over the $2bn mark.

Published in Dawn, March 14th, 2018