PNB says has ability to recover after uncovering giant $1.77 bn fraud

The loan fraud, the largest ever in Indian history has sent PNB's shares tumbling about 20% this week

Photo: Reuters

New Delhi: Punjab National Bank (PNB), India's second-largest state-run lender, said on Thursday that it has the capability and capacity to recover after uncovering a staggering $1.77 billion fraud at one of its branches that went undetected for years.

The loan fraud — the largest ever in Indian history — has sent PNB's shares tumbling about 20 percent this week.  "This cancer that's been going on since 2011, we have brought it out and we are resolving it," PNB's Managing Director and Chief Executive Sunil Mehta said at a press briefing, adding that the bank would honour all its commitments.

"If the entire onus is on us, we will take responsibility," Mehta said, adding the bank has taken action to book culprits and protect its financial interests.

The bank said Nirav Modi, a billionaire jeweller and diamond merchant it believes to be at the centre of the fraud case, has so far not come up with any concrete plan to repay PNB. The bank said it has asked Modi to come up with a formal repayment plan.

Modi's jewellery stores and other business establishments were raided by law enforcement officials in Mumbai and New Delhi on Thursday, Reuters witnesses said. Modi, who has not spoken about the case so far, could not be reached for comment. His flagship company Firestar Diamond has said it had no involvement in the case.

Indian bank shares slid further on Thursday a day after being hit by news of the bank fraud.

PNB, which has assets of $120 billion, disclosed the fraud in a regulatory filing on Wednesday, saying it had referred the matter to law enforcement agencies.
Given the scale of the fraud, the fallout from the case could spread and give rise to fresh questions about lending procedures at Indian lenders, particularly public sector banks, mired in soured debt.

ONGOING PROBE

PNB first notified India's Central Bureau of Investigation (CBI) of its discovery in late January, and on Monday it issued a "caution notice" to warn other lenders about the suspected fraud.

PNB has said that two junior officials at one of its branches in Mumbai had illegally issued "letters of undertaking" to get overseas branches of other lenders to extend credit to "a few select account holders," most notably companies with ties to Modi, who runs a global diamond jewellery business. 

Indian federal agents last week said they were investigating the jeweller and others over accusations that they defrauded PNB of $44 million. A CBI official told news agency Reuters on condition of anonymity that the cases were related.

Television news channels reported that investigators also raided Modi's home in Mumbai on Thursday. A finance ministry official said the Enforcement Directorate, a government agency that fights financial crime, would investigate the case to see whether it involved money laundering.

SHARES TUMBLE

On Thursday, PNB shares sank more than 14 percent, its biggest fall since 2009, after having dropped 9.8 percent the day before. The steep fall has wiped tens of billions of rupees off PNB's market value.

The fall dragged the National Stock Exchange's Nifty PSU bank index down 2 percent on Thursday, after it fell as much as 2.8 percent on Wednesday. India's broader NSE share index was up 0.2 percent by mid-afternoon, tracking gains in Asian shares, after losing less than 0.4 percent on Wednesday.

PNB has not named the other banks it said had advanced money to customers based on the fraudulent transactions.

However, the BTVI news channel cited unnamed sources saying that Axis Bank had discounted Rs 40 billion ($624.4 million) worth of fraudulent LoUs from PNB and that it had sold a majority of this to SBI.

Axis Bank said on Thursday that it had dealt in transactions that had been guaranteed with letters of undertaking from PNB, but that it had since sold those transactions.
Axis shares were down less than one percent in mid-afternoon trading.

"We await more details, but if the 'other banks' have advanced money to overseas suppliers against PNB's letter of credit, PNB would have to honour the payments, in our view, and would have to seek to recover the money from these overseas suppliers," said Morgan Stanley analyst Sumeet Kariwala, in a note to clients on Thursday.  "This could subject PNB to significant potential impairments," he wrote, adding this could increase the bank`s capital requirement by Rs 80 billion ($1.25 billion).

(With Reuters inputs)