LoU ban: Policymakers need to be careful, says Sanyal Interpol help sought against Nirav Modi, Choksi

Thursday 15th March, 2018

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Publication  The Financial Express
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LoU ban: Policymakers need to be careful, says Sanyal Interpol help sought against Nirav Modi, Choksi
New Delhi, March 14
A DAY AFTER the Reserve Bank of India (RBI) banned banks from issuing LoUs, finance ministry's principal economic advisor Sanjeev Sanyal on Wednesday said no issue can be dealt in silos and policymakers have to be careful that blocking of one route does not spread to rest of the system.
The RBI on Tuesday barred banks from issuing guarantees in the form of letters of undertaking (LoU), as it clamped down on the import financing route used by fugitive jeweller Nirav Modi and his uncle Mehul Choksi for allegedly committing the country's biggest bank fraud. Besides, it also banned issuance of letters of comfort, which, like LoUs, are used by importers to fund their overseas purchases.
Asked if the RBI decision is an overreach action, Sanyal said, "I am not in a position to comment on RBI decision they have just introduced. But, the general point remains that you have to take a nuanced view of these things in particular because you are not dealing with a silo system. You are dealing with interconnected ecosystem and if you block off oxygen in one part it rapidly spreads to rest of the system. So, you have to take care of these things. So, while I do not wish to comment on specific decision, this is something that policy makers have to be careful about," Sanyal said at an AIMA event here.
As a trade financing measure, overseas banks usually lend to importers based on the LoUs issued by their banks. And the raised money used in
Sanjeev Sanyal
making payment to offshore suppliers in foreign currency.
The change in regulations may hit import dependent
businesses and trade that are often reliant on LoUs to get bank guarantees.
Sanyal said the government is carrying out some very important measures to deal
with bad loans by auctioning off some big companies. He said the more immediate thing that needs to be done to fix governance in banks is by strengthening the regulation
and supervision. "We need to do something about the board of the banks," he said, adding that the the Banks Board Bureau was a step in that direction.
THE ED HAS moved the Interpol for issuance of a red corner notice against diamond traders Nirav Modi and Mehul Choksi in connection with the over ?12,000-crore PNB scam. Officials said the agency had sought
issuance of the Interpol warrant against the two,based on court-issued non-bailable warrants obtained by it in a money laundering case. The agency is understood to have sent the request to the CBI for talcing it
up with the Interpol headquarters in Lyon, France.Ared corner notice is issued "to seek the location and arrest of wanted persons with a view to extradition or similar lawful action" in a criminal case probe. ?PTI