LETTER OF CREDIT (LC)

LETTER OF CREDIT/LETTER OF
UNDERTAKING
• A letter of credit, also known as a documentary
credit, bankers commercial credit, is a payment
mechanism used in international trade to perform
the same economic function as a guarantee, by
allocating risk undertaken by contracting parties.
• A letter of credit, or "credit letter" is a letter from a
bank guaranteeing that a buyer's payment to a
seller will be received on time and for the correct
amount. In the event that the buyer is unable to
make a payment on the purchase, the bank will be
required to cover the full or remaining amount of
the purchase. It may be offered as a facility.
 PARTIES INVOLVED IN LC
• The opener: The opener is the buyer (importer). A letter of credit is opened on the request of the
buyer.
• The issuer: The issuer is also known as the opening or issuing bank. The issuer is actually the bank
in the importer’s country, issuing the letter of credit at the initiative of the importer.
• The beneficiary: The seller or exporter is the beneficiary in whose favor the letter of credit is issued.
• The confirming bank: The confirming bank will be situated in the exporter’s country. It guarantees
credit on the request of the issuing bank. The confirming bank is the primary party to the credit and it
undertakes all the obligations of the issuing bank. Even if the issuing bank fails, the confirming bank
is bound to honor its commitment.
• The notifying bank: The notifying bank notifies the beneficiary that the credit is opened in his favor.
If the letter of credit is confirmed, the con6rming bank advises the beneficiary accordingly.
• The paying bank: A draft or bill of exchange is drawn on the paying bank. The paying bank may be
the issuing bank, the confirming bank or the notifying bank.
• The negotiating bank: The negotiating bank pays or accepts the draft of the exporter. When no
paying bank is specified in the letter of credit, the beneficiary may go to any bank of his choice and
present the draft and related documents under the credit. If the bank agrees to negotiate the
documents, it becomes an endorsee and bonafide holder of the draft. It has recourse on the drawer of
the bill until it is accepted and paid by the drawer.
HOW LETTER OF CREDIT WORKS?
On one morning, PNB informed the BSE (Bombay Stock
Exchange) that it has detected some “fraudulent and
unauthorized transactions” in one of its branches in Mumbai
to the tune of $ 1.77 billion(approx.) allegedly done by one
of the richest the country’s richest men, who deals in pearls
and diamonds. Shares of the lender, Punjab National Bank
(PNB), plunged on the news ,dragging down the other
lenders when it is said that the scam may be extended to
multiple banks 
 NIRAV MODI

N I R AV M O D I I S 8 5 T H O N F O R B E S ’ S 2 0 1 7 L I S T O F
INDIA’S RICHEST PEOPLE AND 47 IS ONE OF THE
YO U N G E S T. H E I S T H E F O U N D E R A N D C R E AT I V E
D I R E C T O R O F T H E N I R AV M O D I C H A I N O F D I A M O N D
J E W E L L E RY R E TA I L S T O R E S , A N D I S T H E C H A I R M A N
O F F I R E S TA R I N T E R N AT I O N A L , T H E PA R E N T O F T H E
N I R AV M O D I C H A I N , W H O H A S S T O R E S I N K E Y
M A R K E T S A C R O SS T H E G LO B E .
 MEHUL CHOKSI

• Mehul Chinubhai Choksi is an Indian

businessman, and the owner of Gitanjali
Group, a retail jewellery company with 4,000
stores in India. An arrest warrant for Choksi
has been issued in connection with the
alleged Punjab National Bank fraud case
NIRAV MODI AND PNB
CONNECTION
 PNB alleges that Modi worked with a
former PNB employee, Gokulnath Shetty
who was posted at a PNB branch in
Mumbai from where the fraud
orignated.Shetty was the deputy general
manager in the foreign exchange
department looking after import payments.
 What is the fraud about ?

 In a statement issued to stock exchanges, PNB said it has

detected some “fraudulent and unauthorized transactions
 According to the complaint filed by PNB with the CBI on
January 28, the fraudulent issuance of Letters of
Undertakings (LOU) was detected at the Mid Corporate
branch, Brady House in Mumbai.
 The banks claims they used fake PNB guarantees worth
$1.77 billion to obtain the loans from the overseas branch
of indian banks,claiming to need the cash to import
pearls,according to documents made public or seen by
bloomberg.
Society for Worldwide Inter-bank Financial
Telecommunication (SWIFT)
• In the PNB case, the accused officials misused the Society for Worldwide
Inter-bank Financial Telecommunication (SWIFT) system to verify the
fraudulently issued LoUs, confirming to the overseas branches of several
banks that they could extend foreign exchange credit to the beneficiaries
• SWIFT is a messaging system used by lenders the world over to transfer
money between banks, particularly foreign currency funds. The
messages are sent via an encrypted channel to ensure that transactions
remain secure.
• In PNB’s case, LoUs were issued via SWIFT in favour of Nirav Modi. An
LoU is a bank guarantee from PNB (or any other bank) on the basis of
which the overseas banks grant loans. The PNB employees reportedly
shared the SWIFT password with Modi’s aide, allowing fraudulent
authorisation of transactions.
• Typically, clearing a SWIFT transaction involves three people: a maker,
checker, and verifier. The maker initiates the transaction, and inputs
from the checker and verifier are used to authorise it. These act as
additional layers of security to minimise frauds.
 RECOVERY FROM PNB FRAUD
•  In what could turn out to be a massive setback for Punjab National
Bank, enforcement agencies have exclusively told that they are
expecting to recover only 15-20 per cent of the total Rs 13,600 crore
fraud, in which Nirav Modi and Mehul Choksi are the key accused.
The admission comes despite agencies seizing many assets from the
duo in form of cars, expensive paintings, jewellery and real estate
worth almost Rs 7,000 crore.   
• However, the real recovery amount for the bank is likely to be much
lower than the fraud amount: a mere Rs 2,000 to 3,000 crore is what
the bank is expected to recover, as per sources who spoke to ET
NOW.  The Enforcement Directorate is of the view that the scope of
recovering even 50 per cent of the funds lent to Nirav Modi is “very
slim” as they have observed significant value erosion for most of the
movable and immovable assets as well as jewels and diamonds.   
• Another reason for the development is the fact that ED will not be
able to seize any more of properties linked to Modi in India as they
are not in his name
 PNB FRAUD IMPACT ON INDIAN
ECONOMY
• Goldman Sachs predicted a cut India’s economic 
growth estimate from 8% to 7.6% for financial
year 2019.
• Increase in non-performing assets(NPA’s)/bad
loans. This puts the approximately Rs8 trillion
worth of bad loan stockpile of the banking sector
in the spotlight.
• Decrease in the share prices of PNB.
• Degradation in goodwill of banking industry and
its working.
• PNB is struggling to raise growth capital due to
bad loan provisions.
PNB STOCK PERFORMANCE
PNB PERFORMANCE GRAPH