Nirav Modi fraud case could trigger prompt corrective action on PNB: Kotak report

The state-run lender had detected fraudulent transactions worth Rs 11,400 crore at one of its branches in Mumbai.

Photo: Reuters

New Delhi: The Rs 11,400 crore fraud detected at country's second-largest public sector lender Punjab National Bank (PNB) could trigger prompt corrective action (PCA) by Reserve Bank of India, leading to the stoppage in lending by it for some time, Kotak Institutional Equities said in a report on Thursday.

The state-run lender had detected fraudulent transactions worth $1.77 billion (Rs 11,400 crore) at one of its branches in Mumbai.

The transactions were carried out by diamond jeweller Nirav Modi by acquiring fraudulent letters of undertaking (LoU) from the lender's Brady House branch in Mumbai to secure overseas credit from other Indian lenders.

The lender had said it would honour all 'bonafide' contracts suggesting that some of the claims may be disallowed while the other public banks are suggesting that this may not be the case.

"The impact on PNB, if this fully materialises is meaningful. Adjusting for the nine-month FY18 profits and the recent capital infusion, we expect tier-1 ratio at 7 percent implying an impact of 230 basis points from this incident," the report said.

For the nine months ended December 31, the lender reported a net profit of Rs 1,134 crore as against Rs 1,063 crore in the year-ago period.

As of December 2017, the lender's tier 1 ratio stood at 9.15 percent.

"While a PCA cannot be ruled out on the bank given these lapses, it would nevertheless force the bank to pull back lending for some time till it shores up its capital base," the Kotak Institutional Equities report said.

The bank can sell the stake in some of its subsidiaries and joint ventures to raise money but since they are contractual agreements, it may take some time.

According to report, "a combination of stake sale in a few valuable entities like PNB Housing Finance (33 percent worth Rs 6,600 crore), insurance (10 percent stake in Metlife) and mutual funds (UTI MF-17 percent) to raise funds, but since these are contractual arrangements, it can delay unlocking this value."

The government has announced that it will infuse Rs 5,473 crore in PNB before March 31.

The report further said that banks have been reducing their off-balance sheet risks in recent years. Part of this slowdown has been led by reduced corporate loan demand as project financing has come to a pause resulting in the unwinding of these instruments.

"We do see banks, especially public sector banks, significantly tightening their process post this incident which could put some pressure on corporates as any relaxation is unlikely to be encouraged," the report said.

(With PTI inputs)