cash,Oprisk,OutsourcingPartnership,riskregulation,Risk and Regulation,

cash,Oprisk,OutsourcingPartnership,riskregulation,Risk and Regulation,

Punjab National Bank faces a Rs 11,300-crore liability after the country’s biggestever fraud upended its attempts to set right its finances and some of India’s leading banks scrambled to protect themselves by recalling loans to two leading jewellers.

At a noisy meeting of bankers to resolve the issue after PNB disclosed that it is in the midst of massive fraud by staff that benefitted fashion jeweller Nirav Modi and Gitanjali Gems owned by Mehul Choksi, the banks decided to recall Rs 11,000 crore worth of credit lines sanctioned to the two entities, two people who did not want to be identified said. Other banks and PNB also argued about who will bear liability, with Allahabad Bank, Axis Bank, Union Bank of India and Bank of India stating unequivocally that PNB should bear the burden as the money went out of PNB’s Nostro accounts with them.

PNB is attempting to wriggle out of the mess by claiming it as ‘contingent liability’ and that it was done without proper authorisation though the transactions went through the globally accepted SWIFT messaging system that is binding on all users.

Claims Filed, Says Allahabad Bank
Nostro account refers to an account that a bank holds in a foreign currency in another bank. India’s public financial sector, already going through one of its worst phases due to crippling badloan crisis, was rocked by the revelation on Wednesday. PNB shares slumped and led the main Bank Nifty into a downward spiral that also spooked broader markets.

“The Bank has detected some fraudulent and unauthorised transactions in one of its branches in Mumbai for the benefit of a few select accountholders with their apparent connivance,” PNB said in a statement. “Based on these transactions, other banks appear to have advanced money to these customers abroad. Liability arising out of these on the bank shall be decided based on the law and genuineness of underlying transactions.”

“Our Hong Kong branch had taken buyers’ credit exposure against unconditional and irrevocable letters of undertaking,” said Usha Ananthasubramanian, managing director of Allahabad Bank, who headed PNB before her current stint. “The money have been credited to the Nostro account of PNB’s branch. Therefore, the exposure is clearly on PNB, we have already filed our claims.”

Allahabad Bank has Rs 2,000-2,200 crore exposure to PNB, which was honoring the claims till January 5 but started defaulting from January 25.

“LoUs act as guarantee and buyers’ credit is normally given against 100% margin,” said a former chairman of one of the banks involved. “The basic liability falls on PNB but it also needs to be seen whether proper due diligence was performed by other banks. It’s their duty to find out whether the Lo-Us were genuine,” he said.

The fraud which has been going on since 2010 at the Brady House branch of the bank in Mumbai came to light in January after an employee who was rolling over the letters of understanding retired. Subsequently requests for rollover from banks such as Allahabad Bank, Union Bank of India and Axis Bank were not honoured by the new staff overlooking the account, said bankers choosing anonymity.

Gokulnath Shetty, a retired PNB deputy general manager, and Manoj Kharat are among the staff accused of abusing their positions and helping the fraudsters.

Firms controlled by Nirav Modi and Mehul Choksi on January 18 approached the branch with import documents seeking buyers credit to fund their imports, the bank said in a complaint with the Central Bureau of Investigation. On checking the records, it was found that the firms did not have such facility sanctioned.

On further investigation into the account, it was revealed that the transactions between PNB and other banks on behalf of the two were going on for years without being detected.
This was because its software was not integrated with the SWIFT messaging system that is used for international transactions.

Firms involved
Three firms are believed to be involved — Stellar Diamonds, Diamonds R Us and Solar Exports. They would contact PNB for buyers’ credit claiming that it is payment against exports. The banks kept paying believing that PNB had done all checks.

Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were alleged to be partners in those firms.

A Gitanjali company official, speaking on behalf of Choksi, said that he was a former partner of Diamonds R US and retired in 1999. For the said period under scrutiny i.e. 2017 and for more than a decade prior, Choksi was not involved in any manner with the said firm, the official added.

The official further said that Choksi has never had anything to do with Solar Exports and Stellar Diamonds in any capacity and he was not involved in any dealings that these firms may have had with any banks or financial institutions. For the Indian banking industry that was just about to see the end of years of bad loans-induced misery, the latest fraud is a blow that is likely to set their progress back by a few years if the money is not recovered quickly.

But experts said that the recovery in this case would be meagre and the government which decided to invest Rs 2.1 lakh crore in capital may have to come up with more. “The matter is already referred to law enforcement agencies to examine and book the culprits as per the law of the land,” PNB said in a regulatory filing.

PNB, which reported a December quarter profit of Rs 230.11crore and a tier-1 equity capital adequacy ratio of 8.05% may be vulnerable if it has to pay the entire Rs 11,000 crore, which is almost a third of its market capitalisation.

Since the banks involved are mostly state-run institutions, the government and the regulator have to step in to ensure that payments are orderly and that there is no distrust among lenders that could freeze up markets.

While neither the government nor the Reserve Bank of India made their stance known on the fraud, bankers believe that the two should work out a formula to save the system, failing which there could be rising suspicion.

“It is a question of faith and trust in the system,” said a banker who did not want to be identified. “If banks have to continue to do business with each other there is no way that the regulator can permit this to become a legal tussle that could go on for years.”

Re-disseminated by The Asian Banker from The Economic Times