In a July 2015 directive, the Reserve Bank of India (RBI) asked banks to honour their letter of credit (L/C) commitments, even in unauthorised transactions. The central bank said failing to honour L/C commitments could affect the image of the banking system as well as L/Cs and other guarantees as payment mechanisms.

But the apparent misuse of L/Cs in the high profile scam linked to celebrity jeweller Nirav Modi (DC World News, 16 & 19 February 2018) calls into question the central bank's policy according to documents seen by India's Economic Times (ET).

Credibility at stake

The paper reports that the 2015 RBI directive entitled Guarantees and Co-acceptances states that, "...[if] bills drawn under L/Cs are not honoured, it would adversely affect the character of L/Cs and the relative bills as an accepted means of payment."

"This could also affect the credibility of the entire payment mechanism through banks. Banks should, therefore, honour their commitments under L/Cs and make payments promptly."

Banks' image

In another circular issued in 2015 to co-operative banks, the RBI says that if L/Cs are not honoured, this could affect the image of the banks."

"It is, therefore, necessary that all the banks should honour their commitments under L/Cs and make payments promptly leaving no opportunity for any complaints in this regard," the circular reportedly said.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.