The LoUs and Letters of Credits (LoCs) were allegedly misused by diamond merchant Nirav Modi and his uncle Mehul Choksi to defraud state-owned Punjab National Bank of Rs 12,700 crore in connivance of inside bank officials.
"On a review of the extant guidelines, it has been chose to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category banks with immediate effect", the central bank said in a notification.
After the unearthing of the PNB fraud, an RBI notification last month said: "The risks arising from the potential malicious use of the SWIFT infrastructure has always been a component of their operational risk profile". The guaranties are given for import of all non-capital goods permissible under the Foreign Trade Policy (except gold), and up to three years for import of capital goods.
According to reports, about 30 banks had lent funds to firms related to Mr Modi and Mr Choksi based on the LoU's issued by PNB.
In today's plea before the special CBI court, the agency said it has filed another supplementary complaint about additional fraud of Rs 942 crore, taking the total amount of fraud to Rs 7,080 crore.
PNB, the second-biggest Indian state-run lender, uncovered in January the alleged fraud in which certain bank officials were suspected of colluding with Modi and Choksi to issue fraudulent letters of undertaking (LoUs) for their firms to raise loans from overseas branches of mostly Indian banks.
The RBI has already started a special audit of public sector banks wherein it will closely scrutinise their trade financing activities especially with regards to the issuances of LoUs.
None of these fraudulent transactions were registered on the bank's internal transaction messaging system, the Core Banking Solution (CBS), enabling the fraud to go undetected for long.