PNB tanks 21% in 2 days on transaction fraud of Rs 11,333 cr; PSU Bank index falls 1.1%

Apart from PSU banks, some jewellery companies also involved in the fraud, which include Gitanjali Gems that crashed 20 percent to close at 52-week low of Rs 46.90.

PNB, the country's second largest public sector lender, on Wednesday detected fraud transactions totaling over Rs 11,300 crore at its Mumbai branch. This led to the share price tanking 9.8 percent in previous session.

The fraudulent transaction amount is 2.55 percent of total loan book of Rs 4.5 lakh crore (as of December 2017). It is also 8 times of bank's FY17 net profit of Rs 1,324 crore.

"The bank has detected some fraudulent and unauthorised transactions (messages) in one of its branch in Mumbai for the benefit of a few select account holders with their apparent connivance. Based on these transactions other banks appear to have advanced money to these customers abroad," the third largest public sector lender had said on Wednesday.

The quantum of transactions is USD 1,771.69 million (approximately), it added. (1 US dollar - 64.15)

As per CNBC-TV18 report, PNB in its letter to banks said it addressed letter to chiefs of 30 banks informing them of fraud dated February 12 and found a junior branch officer issued unauthorised & fraudulent letter of undertaking (LoU) through SWIFT.

An LoU is a letter of comfort issued by one bank to branches of other banks, based on which foreign branches offer credit to buyers.

LoUs issued on behalf of some companies belonging to Nirav Modi Group companies, which include Solar Exports, Stellar Diamonds & Diamonds RU, it added.

The bank said LoUs were issued to avail buyer’s credit from overseas branches of Indian banks and none of the transactions were routed through core banking system (CBS) system, thus avoiding detection.

It further said similar modus operandi used by same branch official in companies belonging to Gitanjali Gems. "LoU/FLCs (Foreign Letter of Credit) issued on behalf Gitanjali Gems companies including Gitanjali Gems, Gili India and Nakshatra."

Fraud was detected on the retirement of the PNB branch official.

According to sources, Nirav Modi, the owner of Stellar Diamonds, has written to bankers saying he will pay back the loans and promising banks to honour all dues.

Nirav Modi is looking for suitors for its flagship brand - Firestar Diamond that is valued at over Rs 6,435 crore. He said sale process of Firestar Diamond would take 3-6 months.

Sources on Wednesday told CNBC-TV18 that six banks found to have discounted bills against PNB-issued LoUs to Nirav Modi and Gitanjali Gems.

Union Bank, Axis Bank, Bank of India, Canara Bank, Allahabad Bank and SBI overseas branches gave buyers credit against PNB's LoUs.

Sources said overseas branches of Union Bank gave Rs 2,300 crore credit against PNB's LoUs, Allahabad Bank Rs 2,000 crore, and overseas branches of SBI Rs 960 crore.

Six banks argued that PNB must bear liability as money was sent to its Nostro account.

Meanwhile, Axis Bank discounted bills of over Rs 2,000 crore against PNB’s LoUs but sold entire exposure subsequently, sources said.

Axis Bank, in a BSE filing, confirmed that through overseas branches in the past, it had undertaken such transactions with PNB against their authenticated SWIFT LOUs but it had sold down all the referred transactions.

In the normal course of trade business, Axis Bank said, through its overseas branches, it undertakes transactions against letters of undertakings (LOU) issued by other banks. These amounts are then credited to the LOU issuing bank's Nostro accounts.

Meanwhile, the bank, on February 6, reported Q3 profit growth of 11 percent at Rs 230.11 crore and net interest income growth of 7 percent at Rs 3,989 crore year-on-year.

It showed a good improvement on asset quality front for December quarter as gross non-performing assets were lower at 12.11 percent compared to 13.31 percent in previous quarter. Net NPAs were also lower at 7.55 percent from 8.44 percent on sequential basis.