OperationalRiskSecurity,Operational Risk Management,riskregulation,Risk and Regulation,

OperationalRiskSecurity,Operational Risk Management,riskregulation,Risk and Regulation,

The ₹12,700 crore Letters of Undertaking (LoU) fraud at the Punjab National Bank (PNB) could punch a bigger hole in India’s banking system as the closure of Nirav Modi and Mehul Choksi’s jewellery businesses by investigative agencies, is likely to result in another ₹8,000 crore of loans extended to them by banks turning into non-performing assets (NPAs).

According to Reserve Bank of India (RBI) guidelines, banks have to write off the entire loan amount once a fraud has been reported. So, the entire $2 billion exposure of the country’s second largest bank PNB through LoUs issued in favour of Nirav Modi group firms will have to be booked as an NPA. Now, banks are preparing for another ₹8,000 crore or about $1.2 billion in bad loans, taking the total damage to about $3 billion.

ICICI Bank leads the consortium of lenders to Choksi's Gitanjali Gems. The total amount of bank loans to Gitanjali stands at around ₹5,300 crore. ICICI Bank has an exposure of ₹500 crore . However, Punjab National Bank has the largest exposure to the Gitanjali group.

Bank loans to Nirav Modi’s firms — Firestar International Private Limited and Firestar Diamond International Private Limited — stand at about ₹2,500 crore.

Most banks have appraised their boards about their exposure to these companies. Bankers said the loans to these companies were already at the second category of special mention accounts (SMA-2).

If a loan repayment is due for over 60 days but less than 90 days, the account is accorded SMA-2 status.

If the dues remain unpaid for 90 days, it is classified as non-performing.

Re-disseminated by The Asian Banker from TheHindu