New Delhi: State-run Punjab National Bank on Wednesday said it will honour all letters of undertaking (LoUs) it had issued to group companies of Nirav Modi and Mehul Choksi in the Rs12,636-crore PNB fraud.

The decision, which ends weeks of uncertainty, comes as a respite for banks which had lent to these companies based on the fraudulently obtained LoUs. Overseas branches of State Bank of India, Bank of India, Allahabad Bank and Union Bank of India, among others, had extended such loans.

The decision to end the dispute with other banks over the liability of the fraud was taken at a board meeting, PNB said in a statement.

The board has approved payment related to LoUs and foreign letters of credit (FLC) issued by the bank which mature on or before 31 March, the bank said, adding this will lead to settling of LoUs related to the fraud worth Rs6,500 crore with seven banks. “The bank will also honour all subsequent maturing LoUs and FLCs as and when they are due," the statement said.

The bank had initially said that it was classifying the dues as contingent liability and will decide on its final liability depending on the findings of the investigating agencies probing the fraud. It had maintained that it will honour all bona fide commitments, but pointed out that other banks also failed to do the due diligence while giving loans to Modi and Choksi’s group firms.

Group firms of Modi and Choksi secured loans from international branches of other banks based on LoUs issued by employees of PNB. These were not recorded in PNB’s core banking system. The bank issued a total of 1590 LoUs to group firms of Modi and Choksi since 2011.

The decision to pay was taken after consultation with the government and the Reserve Bank of India (RBI) and after the bank weighed the odds of either providing for the liability or paying the dues to other banks, said a person familiar with the development.

Going with the first option will help generate goodwill for the bank, the person said on condition of anonymity. PNB said the decision of the board will ensure that there will be least disruption to the banking system. Some of these banks have already received the money, said bankers.

Gopika Gopakumar contributed to this story.

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