The apex bank in its notification said,"It has been made a decision to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category -I banks with immediate effect".
Also, AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers.
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.
Punjab National Bank had reported fraudulent issuances of Letters of Undertakings (LoUs) and Letters of Credit (LoCs) for the payment of import bills and fraudulent transactions in accounts, amounting to Rs 12,967.86 crore to the RBI through its fraud monitoring reporting system.
LoU is sanctioned by one party, such as an independent contractor, describing the scope of work that's going to be provided.
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What happened in this case is that PNB officials allegedly used their access to SWIFT messaging system, which is used for overseas transaction.
However, letters of credit and bank guarantees will continue upon meeting certain conditions, the central bank said in a press statement. They did not have any pre-approved credit limit either.
Thus, many Indian banks' overseas branches sanctioned forex credit.
The central bank has also mandated commercial banks to put in place adequate audit and compliance mechanisms with bank board-level reporting through the audit committee of the board, the minister added. Recent reports also highlight that, billionaire Modi has refused to join the CBI investigation related to the case, citing that he has a business overseas.