Letter of Understanding (LOU), is the key to execute, the ₹11,300 Cr fraud recently in the Indian economy, another failure of the system.
What is Letter of Understanding (LOU)
In simple terms letter of understanding is the promise in which bank allow another Indian bank in a foreign branch to grant credit to the customer.
Letter of understanding is as same as Letter of credit in India.
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For the purpose of issuing of the letter of understanding from the Bank, the customer required to submit the margin money and on the basis of that and protocol the bank issue letter of understanding to the customer.
but in the case of Nirav Modi, no such protocol is followed, Modi never deposits any margin money and that the seed to fraud begins with.
Nirav Modi through his three companies Diamond RUs, Stellar Diamonds, Solar Exports pay their suppliers on regular interval through AXIS bank, Allahabad Bank by submitting the Letter of Understanding (LoU).
Reasons for PNB Fraud
After scrutiny when the borrowers fail to repay the Loans the banks (PNB) is bound to pay the leaded money to the Banks, but it was observed that the “LoU issued are fake”.
In Early this year, when Modi companies ask to further LoU to the Bank, and Bank refuses to issue the same and ask Modi companies to kept 100% collateral.
Modi companies employees give the statement that there is so much collateral kept before in earlier transactions, after scanning the matter.
It was discovered by the Bank officers that there is so such record available with the bank system.
The LoU issued to Modi companies are fake and with the help of PNB employees.
RBI asks PNB to pay all these Banks that gave Loan to Modi firm.
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