Image default

Rs 11,000 crore PNB fraud will have a domino effect on banks

Punjab National Bank (PNB) has said that it faces a contingent accountability in respect of letters of undertaking (LoUs) that have been fraudulently issued to Nirav Modi and Mehul Choksi groups. The bank wrote letters to all major lenders on Wednesday, informing them of the fraud. Banks, which have lent on the basis of the LoUs issued by PNB, have an exposure close to Rs 11,000 crore. LoUs are like a bank guarantee that undertakes to pay lenders if borrowers default.
Bankers say dozens of lenders have provided loans against the LoUs issued by PNB. Initial investigations recommend that Allahabad Bank, Axis Bank and Union Bank had funded close to Rs 7,000 crore on the strength of the LoUs, with Allahabad Bank having the biggest exposure. However, a major chunk of the loans were sold down. SBI and Bank of Mauritius are understood to have a secondary exposure.
In banking circles, these loans are treated more like interbank exposures as lenders have recourse to the bank issuing the guarantee. These loans are also traded by banks among themselves in the same manner that they trade bonds. For instance, Axis Bank, which has funded some of the imports through its overseas branch, has sold some of the loans to other banks.
With no affirmation from PNB that it will honour the fraudulent guarantees, financing banks will find themselves stuck for payment. Bankers fear a legal stalemate as those who purchased loans in the secondary market will approach the financing banks. The lenders, in turn, will approach PNB to invoke the guarantee. PNB’s caution letter to banks stating the LoUs are fraudulent is seen as an indicator that the bank is trying to deny accountability.
Some banks are saying that the RBI will have to intervene to break the likely stalemate. In banking frauds that took place in earlier years, defaults ballooned in excess of the funds siphoned off as accounts were frozen and claimants went to court.

Lenders say that the RBI will have to intervene to prevent such a stalemate from occurring again. Although PNB denies liability on the grounds that the transactions are fraudulent, lender banks claim that since the transactions have gone through the Swift messaging platform — which is the basis for settling trade deals globally — the contracts have to be honoured.

Related posts

Pakistan calls home envoy in India for meeting to discuss diplomatic tensions


Race for RS appointee seat will test Opposition solidarity


BJP spells out new Kashmir policy: No mercy for terrorists


Leave a Comment