The CBI has alleged that firms controlled by diamond traders Nirav Modi and his uncle Choksi obtained fraudulent LoUs and letters of credit (LCs) worth Dollars 2 billion (Rs 12,636 crore) from PNB in connivance with bank officials.
India's central bank for the first time scrapped the system of issuance of guarantees like Letters of Undertaking (LOU) and Letters of Comfort (LOC) in the wake of the biggest-ever bank fraud of 1.8 billion US dollars.
Companies linked to Modi and his uncle Mehul Choksi defrauded PNB to the tune of Rs 13,600 crore.
Tuesday's disclosure takes PNB's overall exposure in the still unravelling fraud case to well over the $2 billion mark. PNB had previously pegged its exposure to the Gitanjali companies at 61.38 billion rupees.
The central bank's move is likely to lead to a freeze in trade financing activities in India, increasing costs for importers who have relied on these instruments to get cheaper overseas credit to pay suppliers. They did not have any pre-approved credit limit either.
However, the Reserve Bank has allowed banks to issue letters of credit and bank guarantee for trade credits for imports into India subject to compliance with the relevant provisions.
The banned LoUs and LoCs meant receiving banks depended completely on the issuing bank on creditworthiness.
Finance Minister Arun Jaitley told Parliament on Tuesday a total 1,213 fraudulent letters of undertaking were issued to Nirav Modi's companies between March 2011 and May 2017.
PNB says junior employees at the branch issued LoUs over the SWIFT interbank messaging system without entering any of these transactions on the bank's own system.
"Though this decision will hit Indian importers and jewellery businesses in the short term, it will definitely help bring down the possibility of bank fraud in the long term", a senior official said Wednesday.
The Central Bureau of Investigation (CBI) has registered two cases against Modi. The CBI has in its two FIRs filed on the PNB scam accused that fake LoUs were issued without keeping any margin money as security.
PNB did not immediately respond to requests for comment.