Since 2013-14, as profits slid, PNB kept getting support: Rs 500 crore to Rs 5500 crore

The latest capital infusion by the government, along with steps taken to recover non-performing assets, was pitched as a move towards steady improvement. That strategy could now be hit with the possibility of PNB having to pay for its commitments towards the Letter of Undertakings (LoU) worth over Rs 11000 crore — eroding nearly one-fourth of the bank’s net worth of Rs 35,500 crore at March-end 2017.

Read | PNB fraud expands: Rs 3000 crore more from 17 banks, money laundering evidence

The bank’s Gross NPA, after peaking at 12.9 per cent in 2015-16, declined slightly to 12.53 per cent in 2016-17. With the chances of these “fraudulent transactions” turning into NPAs, the slight momentum gained in containing the bad loans could be reversed.

On Thursday, the PNB management said it will pursue recovery and has received some “vague offers” for repayment of money from jewellery designer Nirav Modi, whose companies are embroiled in conducting fraudulent transactions worth $1,771.7 million (Rs 11,000 crore) in connivance with some bank officials.

DRI and IT: Modi was under regulatory scanner

PNB MD and CEO Sunil Mehta said the fraud started in the year 2011 but was detected by the bank only last month. A senior bank official, who did not want to be named, admitted to “laxity” on the part of the lender to explain why it took so long for the transaction to be detected.

Bank officials also said that depending upon how much liability eventually falls onto the lender, it will have to make corresponding provisions in the March and June quarter, which will directly hit its profitability and net worth. Besides the LoUs, the lender has around Rs 1,700 crore in funded exposure to companies involved in the case.

Read | Inside the Punjab National Bank fraud: What an LoU is, how case may impact the bank

“We have already initiated the process (of recovery). The ED (Enforcement Directorate is) also confiscating properties and current assets. We hope we will be able to recover a good amount. We are already in the mode of recovery. We are trying to protect the financial interest of all the lenders,” Mehta said. The LoUs are in the form of unsecured loans and not backed by any collateral assets.

Read | Cong accuses Modi govt of letting businessmen escape with public money

“Nirav Modi has not come out with any concrete plan to repay so far. But they’re coming out with some vague offers which are under examination…He has not come to us personally. We have requested him to come and give us a plan. And give us a written plan for the repayment,” Mehta said at the bank’s headquarters in Delhi.

Nirav Modi

Since the Society for the Worldwide Interbank Financial Telecommunication (SWIFT) that the PNB uses to facilitate overseas financial transactions was not integrated with its Core Banking Solutions, the bank could not detect the fraudulent issuance of Letter of Undertakings (LoUs) that was going on below the radar.

Certain PNB officials were issuing and rolling over LoUs through the SWIFT mechanism without making a corresponding entry into the CBS to ensure that it is not detected.

Meanwhile, Department of Financial Services Secretary Rajiv Kumar said Thursday that the fraud was detected due to the pressure on banks to clean up their books and that it was a “systemic issue”.

Vehicles called by ED to transport money, jewellery and documents from the Chanakya. (Express photo by Abhinav Saha)

“It is because of the pressure (that this has come to light). If it was to get rolled over, it would have got rolled over this time also. The first due was on January 23, so the moment it came to notice that it has to be rolled over, it was not rolled over. So, because of the pressure on the banks to clean up the system, they couldn’t do it and the bank itself detected it,” Kumar said.

When asked why it could not be detected for seven years, Kumar said: “It’s a systemic thing. This has to be looked into.” Mehta claimed that this was a “standalone” case at the PNB’s mid-corporate Brady House branch in Mumbai and other branches were not affected.