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Reserve Bank of India bans banks from issuing letters of undertaking

India's central bank banned banks from issuing letters of undertaking for trade credits for imports to India.

The Reserve Bank of India said March 13 that banks may no longer issue letters of undertaking and letters of comfort for trade credits, effective immediately.

Letters of undertaking are bank guarantees that allow customers to raise money from another Indian bank's foreign branch in the form of short-term credit.

The central bank's move followed the US$2 billion fraud uncovered at Punjab National Bank, which centered around letters of undertaking. Staff at a Mumbai branch of the state-owned bank allegedly used cross-border payments company SWIFT's encrypted messaging system to send requests to other banks without the required approvals.