NEW DELHI, March 14 (Xinhua) -- India's central bank for the first time scrapped the system of issuance of guarantees like Letters of Undertaking (LOU) and Letters of Comfort (LOC) in the wake of the biggest-ever bank fraud of 1.8 billion U.S. dollars.
While LOUs allow the customer of a bank to withdraw foreign currency from an Indian bank abroad, LOC is an assurance for payment extended by a third party for imports into India.
The decision was taken by the Reserve Bank of India Tuesday after it came to light recently that at least three companies, owned by billionaire jeweller Nirav Modi who is the mastermind of the bank scam, fraudulently secured LOUs from state-owned Punjab National Bank.
"Though this decision will hit Indian importers and jewellery businesses in the short term, it will definitely help bring down the possibility of bank fraud in the long term," a senior official said Wednesday.
Indian investigators have so far arrested nearly 20 people, including some senior executives of companies owned by Modi and his uncle Mehul Choksi as well as high-ranking officials of the Punjab National Bank, in the bank fraud probe.
Though Modi has not yet been arrested, India's External Affairs Ministry has revoked his passport as well as Choksi's for their involvement in the scam.
Modi is said to have defrauded Punjab National Bank, India's second largest state-run bank, of 1.8 billion U.S. dollars, though he said that he owed the bank only 775 million U.S. dollars, in a letter sent to the bank's management.
The celebrity jeweller is said to have fled the country and was reportedly last seen in New York after his appearance at World Economic Forum in Davos as a member of the Indian delegation.