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SWIFT
Why is it in the news?
- The Reserve Bank of India had twice cautioned the banks about the possible misuse of SWIFT infrastructure, much before the letters of undertaking (LoU) scam came to light at the Punjab National Bank.
- RBI had also directed them to implement safeguards.
More about the news
- SWIFT:(1) SWIFT stands for the Society for Worldwide Interbank Financial Telecommunications.(2) It is a messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes.(4) SWIFT assigns each financial organization a unique code that has either eight characters or 11 characters.(5) The code is interchangeably called the bank identifier code (BIC), SWIFT code or SWIFT ID.
Letters of Undertaking (LoUs):
Letters of Undertaking (LoUs):
- An LoU is simply a request made to another bank to loan money to a client.
- LoU is an assurance given by one bank to another to meet a liability on behalf of a customer.
- It is similair to a letter of credit or a guarantee.
- It is used for overseas import remittances and involves four parties — an issuing bank, a receiving bank, an importer and a beneficiary entity overseas.
- LoUs are conveyed from bank to bank through “Society for Worldwide Interbank Financial Telecommunication” (SWIFT) instructions.
- The bank that issues the LoU essentially guarantees the bank that receives the LoU request that it stands by the creditworthiness of the borrower. That is, in case of a default, the bank that issued the LoU stands liable to compensate the bank that made the loan to the borrower.
Source
The Hindu, LiveMint.