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PNB fraud case poses fresh challenge to banking sector recovery

Author: Debasis Mohapatra/Thursday, February 15, 2018/Categories: Banking & Financial Services

PNB fraud case poses fresh challenge to banking sector recovery

Mumbai, February 15: Unearthing of fraudulent transactions in state run Punjab National Bank (PNB) is likely to put the banking industry in a fix which is already reeling under the huge burden of bad loan apart from tepid credit growth.

Analysts are also of the opinion that the government may have to step in to resolve this tricky situation through capital support to the affected banks.  

In a filing to stock exchanges, PNB on Wednesday said that a fraud of around Rs 11,200 crore had been detected at a single branch of the bank in Mumbai. “Officials detected some fraudulent and unauthorized transactions in one of its branches in Mumbai for the benefit of a few select account holders with their apparent connivance,” the bank said in a statement. “Based on these transactions other banks appear to have advanced money to these customers abroad,” it added.

This has sent shockwaves in the financial world as the amount involved makes it one of the biggest corporate frauds of India involving a bank.

The banking sectoral index in BSE (BANKEX) felt the heat and dropped 1.62% on Wednesday (February 14) to 28609.02 from its previous close of 29080.

According to PNB, the alleged fraud was perpetrated by employees issuing letters of undertaking (LoUs) for buyers’ credit to entities belonging to Nirav Modi and his uncle Mehul Choksi’s Gitanjali Group. Subsequently, money was raised after discounting these LoUs with around 30 banks.

“The overall impact of the PNB fraud will be felt by the banking industry and will not only be limited to one bank. It has to be seen how the asset quality of the banks is going to be affected due to this fraud,” a banking source said.

Reports have also suggested that Punjab National Bank would have to bear the entire burden of the embezzled amount as other banks have discounted the LoU issued by PNB.

Meanwhile, PNB has filed a complaint with the Central Bureau of Investigation (CBI) alleging that Nirav Modi and associate companies had fraudulently acquired guarantees worth Rs 10,000 crore from the bank which had later been used to obtain loans from abroad.

This has prompted the Enforcement Directorate to conduct raids in multiple properties of billionaire diamond jeweller Nirav Modi across the country. CBI also sealed Modi’s Mumbai flat in connection with the case on Thursday. Apart from Modi, other big jewelers namely Gitanjali, Ginni and Nakshatra are also under the scanner of investigating agencies. 

The fraud case has come at a time when the entire banking industry is reeling under the burden of bad loan problem. As gross NPA in the banking system is estimated to reach Rs 9.5 lakh crore by the end of this fiscal. 

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