Rs 114-bn PNB scam: Why fraudsters prefer to use Letter of Undertaking

Most frauds in Indian banking have been due to use of LCs. And, PNB seems to be a favourite with such fraudsters

What is an LoU?

The Punjab National Bank (PNB) fraud has brought forward an instrument used widely in international trade finance, in Asia and other developing countries in Africa and South America. Termed a Letter of Undertaking (LoU), also called a Letter of Credit (LC), is essentially a guarantee undertaken by a bank. Assuring that irrespective of who carries the negotiable instrument and what happens in between, it would be repaid. The importer takes an LoU, and arranges to pay the client in a currency of choice, typically one of the four major ones – dollar, euro, pound or yen.