Reports are emerging in India that the use of letters of credit (L/Cs) may be increasing, despite them being used in high profile fraud cases in the jewellery trade.

This appears to contradict reports suggesting L/Cs are becoming harder to obtain as a result of their use in such frauds.

L/C reluctance

Several cases have emerged over recent months involving the fraudulent use of L/Cs in the jewellery trade, including the alleged fraud perpetrated by the directors of diamond trader Dwarka Das Seth International.

They employed round-tripping to move funds through fictitious companies abroad and utilised funds by discounting bills based on L/Cs of foreign banks that were either non-existent or had negative ratings (DC World News, 23 March 2018).

Such frauds have reportedly made banks more reluctant to provide L/Cs, prompting the Associated Chambers of Commerce and Industry of India to lobby strongly for a business-as-usual approach at banks writing L/C business (DC World News, 16 March 2018).

RBI bans LoUs

But the most high profile fraud in the jewellery trade centres on Punjab National Bank's loss of US$1.9 billion as a result of frauds allegedly perpetrated by celebrity jeweller Nirav Modi.

These frauds however involved letters of understanding (LoUs) rather than L/Cs, which led the Reserve Bank of India (RBI) to ban the use of import LoUs but not the use of L/Cs or bank guarantees.

L/C option

The RBI's ban has now forced the jewellery trade to look at non-LoU options says the chairman of India's fifth largest company by turnover, gold retailer Rajesh Exports.

"There are only two options left in lieu of LoUs," says Rajesh Mehta. "The first is the L/C, which is a bit costlier than the LoU. And the second option is to make immediate payment without availing credit," he says, noting that L/Cs are about one per cent costlier than LoUs.

According to Mehta, players dependent on bank credit, including importers of gold and silver bullion, are the most affected by the RBI ban.

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