RBI/2004-05/168
DBS. CO.PP.BC. 6 /11.01.005 /2004-05
September 08, 2004
To,
All Scheduled Commercial Banks (excluding RRBs)
Madam/Sirs
Opening of LCs for Import/Export of Gold and
other commodities
We invite reference to our Foreign Exchange
Department circular A.P.
(DIR Series) Circular No. 2 dated July 09, 2004 in terms of which it has
been advised interalia that banker's prudence should be strictly exercised for
all transactions pertaining to import of gold. Further, any large or abnormal
increase in volume of transactions of the importer should be closely examined
to ensure that the transactions are bonafide trade transactions.
Recent scrutinies undertaken by our offices
have disclosed similar large scale opening of Letters of Credit (LCs) in the
import of diamonds and also other commodities like edible oil, copper etc. Two
examples are given below:
- Against LCs opened by the Indian banks for one year for import
of commodities like oils, diamonds, the importer/exporter gets sale proceeds
within a short period of time say 30-45 days. The proceeds are then deposited
with banks as Fixed Deposits (FDs) for opening further LCs. This cycle of
opening LCs had resulted in huge FDs and huge outstanding LCs. The turnover
of the entity in some cases jumped more than ten times within a short period.
- A trading company abroad sent advance payments to an Indian
counterparty. Each advance was supported by a contract in which the Indian
counterparty was stated to be supplying agricultural commodities at the buyer's
option during the period of one year from the date of advance.The
advance so received was kept in the form of FDs with the banks in India and
against these deposits, LCs were opened in favour of the same company that
had sent the advance remittance. Payments were made under the LC on the due
dates. The amount kept as security was rolled over as security for another
LC. The amount of LCs opened in this manner exceeded Rs. 2,000 crore in respect
of the same entity within a short period.
It is needless to add that the safeguards advised
vide FED A.P.
(DIR Series) circular No. 2 dated July 09, 2004 are equally applicable for
unusual increase in import/ export transactions facilitated through LCs opened
by banks in other commodities as well.
Kindly advise us the systems put in place in
your bank for ensuring the adoption of safeguards as advised in FED circular
referred to above in case of gold imports as also other commodities.
Please acknowledge receipt.
Yours faithfully,
-Sd-
(R.C. Arora)
Chief General Manager
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