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Indian central bank ups scrutiny on lenders' letters of undertaking

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Indian central bank ups scrutiny on lenders' letters of undertaking

The Indian central bank has directed lenders to provide information on a type of credit guarantee at the center of a US$2 billion bank fraud at Punjab National Bank, Reuters reported March 9, citing "four bankers who have seen the directive."

The Reserve Bank of India asked banks for details on letters of undertaking, or LOUs, that they issued over the past few years. These included the amounts outstanding and whether the banks had approved credit limits under the guarantees, or maintained sufficient cash on margin before issuing the LOUs, the news outlet said.

The deadline for banks to respond was early in the week of March 5, a source said.

Importers usually use LOUs issued by a local bank to obtain foreign-currency loans abroad from another lender.

The central bank did not respond to queries.

Bank employees at PNB allegedly issued fake LOUs to companies controlled by jewelers Nirav Modi and Mehul Choksi, without any pre-approved limit or margin, to obtain US$2 billion in loans. The lender also accused the staff of omitting the credit guarantees from its accounting system so that the fraud would not be detected.

Meanwhile, Union Bank of India CEO Rajkiran Rai said his bank has direct credit exposure of about 1.2 billion rupees and 1.75 billion rupees to Modi-controlled entities and Choksi's Gitanjali group of companies, respectively, Reuters reported separately the same day.

These sums are separate from the US$300 million exposure Union Bank of India had reported facing previously.

As of March 9, US$1 was equivalent to 65.00 Indian rupees.