PNB may be asked to pay up more because the financial strain of the fraud of this magnitude could spread to a larger financial system.
The Reserve Bank of India has advised Punjab National Bank (PNB) to repay banks which loaned money to firms associated with jewellers Nirav Modi and Gitanjali Gems, sources told Moneycontrol. These banks--foreign branches of Indian banks--had cumulatively loaned Rs 11,400 crore to the above mentioned firms on the basis of a fraudulent Letter of Undertaking (LoU) issued by PNB. The LoU makes PNB liable to repay the loans if the borrowers default.
Mehul Chokshi, the promoter of Gitanjali Gems, is the uncle of Nirav Modi.
According to banking sources, “RBI has asked PNB to make payments as the fraud has happened from the PNB’s premises. Even though the investigations are on, the current loss of the entire amount may have to be spread to all the other banks. Also, given that PNB has admitted to unauthorised transactions by their own officials who bypassed the core banking solutions systems."
"We have asked PNB to honour the payments and are hopeful they would do so by this quarter itself. We will give them time to recover from this jolt…," said an official with one of the above mentioned counterparty banks.
PNB may be asked to pay up more because the financial strain of the fraud of this magnitude could spread to a larger financial system, the source added.
However, investigations are still on and none of the banks including PNB, are above suspicion at this point.
An official with one of the counterparty banks said, “By paying the other lenders, only the balance sheet of PNB will suffer in terms of losses while the other banks will not have to make provisions. RBI does not want the muck to spread deeper.”
PNB, in its letter, has also blamed other banks for negligence and violation of RBI rules, stating that there was connivance between group companies of Modi and Gitanjali with executives at its branch and those of overseas branches of those other Indian banks.
PNB claimed that according to RBI rules, the validity of the LoU is for 90 days from the day of shipment. However, the foreign branches loaned money for a year against the LoUs, in violation of RBI guidelines
“Even though PNB has tried to blame other banks, there isn’t much meat in that story. The RBI’s 90-day period timeline to make the credit does not apply to this transaction,” the above official said.
Another banker also said that RBI has set the rules clear. “We do thousands of such transactions based on LOUs, all of these cannot check the originality from the other banks. Also SWIFT is not so easy to manipulate. This could be a systemic issue for PNB but not the industry. Also, we have given the money to PNB, so they have to repay, though our common fight is against the promoter.”
Sunil Mehta, CEO and Managing Director of PNB, in a press conference has denied receiving any directions from the RBI. He said they sought the intervention of the government to sort out the mess.
Mehta also said, “PNB will not shirk away from responsibility, will take action against those indulging in fraudulent means and also conduct forensic audit if the need arises.”
This is likely to be one of the biggest frauds in India’s banking system that happened at one Mumbai branch of PNB by group companies of Nirav Modi and Gitanjali Group owned by his uncle Mehul Chokshi with the help of two PNB officials. The officials issued unauthorised letters of undertaking (LoUs) against which the jeweler sought credit from foreign branches of the other banks.Going on since 2011, the fraud came to light after one of the PNB officials retired and the new official could not detect the previous LOUs based on which Modi group companies sought more additional credit.