Supervisory action in PNB fraud soon, says RBI

According to banking sources, the bank may end up providing for the full amount in its books but a clear picture will emerge only when investigations are complete and the bank and the RBI scrutinise the details of the fraud.

RBI likely to keep policy rates unchanged for now

The RBI also denied reports in a section of the media that it has directed PNB to meet its commitments under the Letter of Undertaking (LOU) to other banks. (Express Photo by Pradip Das)

The Reserve Bank of India (RBI) on Friday said it will take “appropriate supervisory action” in the Rs 11,400 crore Punjab National Bank (PNB) fraud and termed the fraud a failure of internal controls in the bank. In its first official reaction after the surfacing of the fraud, the RBI said, “the fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls.” The RBI has already undertaken a supervisory assessment of control systems in PNB and will take appropriate supervisory action, it said.

The RBI also denied reports in a section of the media that it has directed PNB to meet its commitments under the Letter of Undertaking (LOU) to other banks. Banks have started disclosing their exposure in the PNB fraud.
“The outstanding exposure related to the incident is approximately $300 million (around Rs 1,915 crore) and the bank is fully secured by LoU /LC /other documents and fully confident to receive the payment,” Union Bank said. “The bank through our foreign branches has been taking exposure with PNB as counter party under various LoUs issued through authenticated SWIFT message. The bank has also purchased some Buyers’ Credit assets from Axis Bank through risk participation as a part of normal international business practice,” Union Bank said.

SBI chairman Rajnish Kumar said the bank has an exposure of $212 million (about Rs 1,360 crore) under LoU issued by Punjab National Bank to Nirav Modi. However, it does not have any direct exposure to the jewellery firm. The bank has lent $ 212 million to Modi on the basis of LoU issued by PNB, he said.

According to Allahabad Bank, its exposure related to the incident is approximately $366.87 million (around Rs 2,340 crore). “The bank is fully secured by LoU documents and fully confident to receive the payment,” the bank said in a stock exchange filing.

Banking sources said PNB may have to make full 100 per cent provisions of over Rs 11,000 crore if the bank and investigation agencies are unable to recover the amount missing in the unauthorised transactions involving the Nirav Modi group.

According to banking sources, the bank may end up providing for the full amount in its books but a clear picture will emerge only when investigations are complete and the bank and the RBI scrutinise the details of the fraud.
“PNB may end up making up to 100 per cent provisioning. It depends on the recoverability of the amount involved in the fraud. Nobody has a clear picture about recoverability of the money,” said a banking source.

According to PNB, the bank liability is contingent only. “The liability shall be decided based on the law of land,” it said. A contingent liability is a potential liability that may occur, depending on the outcome of an uncertain future event. “If PNB doesn’t pay up other banks, there could be double provisioning. PNB and other banks who lost money would end up making provisions. This will put further pressure on the banking system which is already under pressure due to soaring non-performing assets,” officials said.

Story continues below this ad

Punjab National Bank on February 14 said it has detected a Rs 11,400 crore scam where billionaire jeweller Nirav Modi allegedly acquired fraudulent letters of undertaking from a branch in Mumbai to secure overseas credit from other Indian lenders.