Banks are planning to approach the Reserve Bank of India (RBI) to break the impasse with the fraud-hit Punjab National Bank (PNB), which is declining to pay them the dues till investigation into the ₹11,500-crore LoU (Letter of Undertaking) scam is completed, according to an official who attended a meeting of major lenders on the issue on Saturday.
“All the banks first tried to convince PNB to honour the commitments. But they are saying let the investigation be over…. so, ultimately, we decided to refer the matter to the RBI for a final decision,” said the official.
The banks have decided to approach the central bank through the Indian Banks’ Association (IBA).
Last week, the state-run lender informed the stock exchanges about the detection of $1.77 billion (₹11,500 crore)-worth unauthorised transactions where fraudulent letters of undertaking (LoUs) were issued from a branch in Mumbai to secure overseas credit.
‘Liable to pay’
Bankers, at the meeting, pointed out that LoUs were issued by PNB for buyers’ credit.
Since other banks had extended loans to PNB (the amount was credited to PNB’s NOSTRO account) which, in turn, gave the funds to firms involved in the fraud, the state-run lender was liable to pay the other lenders. Allahabad Bank, for example, had an exposure of $366.87 million and State Bank of India $212 million to PNB. If PNB did not pay them, these lenders would have to classify the loans (given to PNB) as NPAs (non-performing assets). In that case, the total loan impairment arising out of this particular case could rise to ₹20,000 crore, sources in banking industry said.
“The bank is fully secured by LoU documents and fully confident of receiving the payments,” Allahabad Bank had informed the exchanges.
Public sector banks, already reeling under huge NPAs, do not want to their books to be impaired further by this issue which, they said they believed, was not of their making. As a result, they now want the regulator to break the deadlock as soon as possible.
2015 guidelines
“They [RBI] have already issued a guideline in 2015 for similar kinds of cases. They have to just reiterate the guideline, which covers all these kinds of scenarios,” said another banker.
The RBI had pointed to the failure of internal control of PNB as being the main reason for the occurrence of the fraud. It said it was assessing the situation and would take appropriate supervisory action.
It may be reaclled that the banking regulator had undertaken a supervisory assessment of the control systems in PNB.
‘Backed by assets’
Some of the banks that had exposure to the companies of Nirav Modi and Mehul Choksi — the main accused in this fraud — said their loans were backed by the assets of companies such as Gitanjali Gems.
The Enforcement Directorate had conducted searches at several properties belonging to Mr. Modi and reportedly seized diamond and gold jewellery worth more than ₹5,000 crore.
