Mumbai, February 19: The biggest corporate fraud involving Punjab National Bank is likely to prompt banks to come up with tighter trade financing rules along with stricter supervision in coming days.
Analysts and bankers are of the opinion that the Rs 11,200 crore fraud case at PNB has come as a rude awakening for the Indian banking system as trade financing rules had been manipulated to benefit specific parties.
“I don’t think there is any requirement for changes in the rules. The guidelines are sufficient for conducting trade financing business. But, there is definitely requirement of higher coordination and supervision,” Former Treasury Head of Union Bank of India, VJ Mhatre told The Finapolis on Thursday.
Notably, a provision of bank guarantee known as Letter of Undertaking (LOU) was the main instrument used in PNB case. LOU is a bank guarantee which allows its customer to raise money from another Indian bank's foreign branch in the form of a short term credit. It helps the customer to make payment to its offshore suppliers in the foreign currency.
In the PNB fraud case, the public sector lender had issued LOU to companies owned by Nirav Modi and Mehul Choksi for payment to their overseas supplier. These overseas suppliers discounted these instruments with banks abroad to receive payment.
When post maturity of these instruments, Modi and Choksi couldn’t pay back, PNB rolled over these Letter of Credits (L/Cs). This happened with many L/Cs which were extended by PNB to create an overall liability more than Rs 11,000 crore.
“This is very strange that such huge exposure had never been red flagged by the senior executives of the bank,” a banking source said.
According to reports, many banks had taken exposure to Nirav Modi and his firms based on LOUs issued by PNB. While SBI has an exposure of around Rs 1,360 crore, Allahabad Bank has disclosed that it has an exposure of Rs 2,000 crore against these instruments.
Similarly, Union Bank has an exposure of Rs 2,000 crore and UCO Bank has around Rs 2,652 crore.
Meanwhile, condemning the incident, the Gem Jewellery Export Promotion Council said, “When thousands of exporters undertake business lawfully adhering to all norms and practices, incidents of this kind can only take place due to non-adherence of procedures and norms."