PNB fraud is a big headache for Allahabad Bank, Axis Bank, Union Bank, SBI–Business Today–16.02.2018

On Wednesday the country’s fourth largest bank lost nearly 10% of its market cap, around Rs 3,800 crore, following news of a 7-year-old, $1.77 billion (over Rs 11,354 crore) fraud at one of its branches in Mumbai. But today, it’s all the banks holding ‘LoU notes’ from PNB that are getting battered.
At the heart of the alleged fraud are the letters of undertaking (LoUs) that allowed billionaire jeweller Nirav Modi to acquire overseas credit from other Indian lenders. An LoU serves as guarantee based on which different banks provide funds to an account holder. So it is, in effect, a letter of comfort issued by one bank-PNB in this case-to branches of other banks.
PNB’s letter to the National Stock Exchange and Bombay Stock Exchange informing them about the fraud yesterday innocuously stated, “Based on these [fraudulent] transactions, other banks appear to have advanced money to these customers abroad”. The bank added that it would evaluate later whether it faces any liability arising out of the transactions. “In the bank these transactions are contingent in nature and liability arising out of these on the bank shall be decided based on the law and genuineness of underlying transactions.”
But PNB’s system failure and oversight actually has serious ramifications for the other banks involved. While PNB did not name other lenders involved, sources in the BSE say that Union Bank of India, Allahabad Bank and Axis Bank figure in the list of banks that offered the jewellery company buyers’ credit based on PNB’s LoUs along with some foreign bank branches. All of them are now facing a probe. According to media reports, these three banks funded roughly Rs 7,000 crore on the strength of the LoUs, with Allahabad Bank having the largest exposure.
Consequently, shares of Union Bank of India fell 1.85% and Allahabad Bank shed 5.6%. However, Axis Bank is trading in the green and touched an intraday high of Rs 554.30, up 1.90% on reports that it has sold down all the referred transactions with respect to PNB’s LoUs. According to The Economic Times, SBI and Bank of India are also entangled in the fraud. “Our Hong Kong branch had taken buyers’ credit exposure against unconditional and irrevocable Letters of Undertaking,” Usha Ananthasubramanian, managing director at Allahabad Bank, which has Rs 2000-2200 crore exposure to PNB, told the daily. “The money has been credited to the Nostro account of PNB’s branch. Therefore, the exposure is clearly on PNB, We have already filed our claims.” Nostro account is one that a bank holds in a foreign currency in another bank, and all the entangled banks named above are reportedly claiming that since the funds were credited into PNB’s Nostro account, it is the latter’s liability.
However, some industry insiders are wondering if PNBs caution letter to banks-highlighting the fraudulent LoUs and the modus operandi of the scam-is an attempt to deny liability. The letter added that RBI norms were overlooked by overseas branches of other Indian banks and alleged connivance of group companies of Nirav Modi and Gitanjali Gems with its own official and also apparently of others working in foreign branches of Indian banks. Besides, the onus of conducting due diligence and checking the authenticity of an LoU rests on the other banks.
So in all likelihood a drawn-out legal battle is on the cards. The entangled banks will try hard to force PNB to honour its dues else the domino effect unleased is sure to do a number on India’s already out-of-control bad loans problem. On the other hand, PNB will be praying for an escape clause or a life vest from the government. Either way, Finance Minister Arun Jaitley’s Rs 2.11-lakh crore recapitalisation plan for public sector banks is suddenly looking a lot less lavish.


via PNB fraud is a big headache for Allahabad Bank, Axis Bank, Union Bank, SBI

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