MUMBAI: India’s infamous Punjab National Bank scam has cast a long shadow over the export-import trade with lenders becoming extra-cautious while issuing Letters of Understanding (LoU) and offering them at a premium.
The huge fraud case has made it difficult for many companies to raise money through LoUs from abroad. However, bankers are confident there will not be a complete freeze on LoUs as that could affect genuine business operations, reports the Press Trust of India.
This tightening of controls and checks has led to a rise in costs for Indian exporters and importers. Even for LoUs already issued, a “risk premium” has been imposed.
An LoU is a guarantee by a bank to pay another lender for imports by companies and is considered crucial for cross-border trade. The scam unearthed at PNB’s branch in Mumbai allegedly involved diamond merchant Nirav Modi and various officials from his company colluding with senior bank officials to issue LoUs without proper checks and securities.
