The Reserve Bank of India (RBI) is concerned about the mounting pile of outstanding letters of credit (L/Cs) opened for imports of diamonds, copper and other commodities.

The RBI has consequently asked India's commercial banks to exercise prudence and monitor any unusual increase in import or export transactions of diamonds and other commodities.

Vigilance

Commercial banks have been asked to be vigilant when writing new L/C business since recent investigations revealed large-scale opening of L/Cs for the import of several commodities, including diamonds, edible oils and copper.

Large or abnormal increases in the volume of transactions entered into by an importer should, according to the RBI, be closely examined by commercial banks to ensure that these are bona fide trade transactions.

L/C build up

The RBI is concerned about the practice in which, typically, importers or exporters are drawing proceeds within 30 to 45 days against L/Cs opened by Indian banks.

The proceeds are then deposited with banks as fixed deposits for opening further L/Cs - a cycle that has apparently resulted in the build up of huge fixed deposits and huge volumes and values of outstanding L/Cs.

Preventative measures

According to the RBI, the accounts of some traders show that their turnover has multiplied tenfold over a short period.

Commercial banks have been asked to appraise RBI on systems put in place to curb the build up of outstanding L/Cs.

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