How one fraudster drove Punjab National Bank to the highest quarterly loss in the history of Indian banking


  • PNB, India’s second-largest government-owned bank, reported a loss of ₹134.2 billion for the quarter ended March 31st.
  • The bank’s provisions surged nearly five times to ₹203.5 billion because it is liable to pay back a lot of the loans that Nirav Modi has defaulted on.
  • Modi and his associates defrauded these banks of ₹130 billion ($1.92 billion) between 2011 and 2017- India’s biggest banking fraud.

The name “Nirav Modi” isn’t likely to go out of news cycles anytime soon. This past February, it came to light that Modi, a prominent Indian jeweller and billionaire, had used his clout to allegedly procure fraudulent letters of undertaking from a Mumbai branch of the Punjab National Bank (PNB).

He then used the letters to get loans from not only PNB, but a number of Indian banks like State Bank of India and Allahabad Bank, and eventually defaulted on the loans, despite issuing additional letters to pay back these loans.

Modi and his associates defrauded these banks of ₹130 billion ($1.92 billion) between 2011 and 2017. This is the biggest banking fraud in India’s history. And now, it’s led to the highest quarterly loss ever by an Indian bank.

PNB, India’s second-largest government-owned bank, reported a loss of ₹134.2 billion for the quarter ended March 31st. Its loss even exceeded its total revenue of ₹129.5 billion.

Given that PNB sanctioned the invalid letters of undertaking, it is the main bearer of liability for the loans that Modi and his partner firms have defaulted on. It will have to drum up the payments for these letters of credit itself.

Hence, it’s provisions for bad loans and defaulted accounts surged 355% from the previous quarter to a staggering ₹203.5 billion. Around 40% of this figure was accounted for by the Nirav Modi fraud alone.

In fact, after staying well under the ₹600 billion mark for all of 2017, the bank’s total amount of bad loans ballooned to ₹866 billion by the end of March 2018. There were around ₹291 billion of fresh bad loans in just the last quarter of fiscal 2018.

The bank’s growth will be severely limited for the foreseeable future. All the capital that the managed to raise from institutional investors, ₹50 billion in December 2017, and the government, ₹54 billion, was insufficient to cover its provisions, let alone its other growth initiatives and capital expenditure.

Given the dire state of PNB’s finances, it is likely to be put under the Reserve Bank of India’s Prompt Corrective Action watchlist (PCA). The operations of 11 of India’s 21 state-owned banks are already being monitored under the PCA programme, which imposes restrictions on fresh loans. PNB is already said to be taking steps to make credit underwriting norms more rigorous and improving its internal auditing process.

Meanwhile, the Nirav Modi fraud is still being investigated by India’s Central Bureau of Intelligence and judicial authorities, and names are finally being named. A charge sheet against Modi and his uncle, Mehul Choksi, - both of whom are absconding - was filed by the investigative agency earlier this week. A number of other people, including senior directors at PNB and Allahabad Bank, were also charged in the filing for various breaches. The senior management of all the banks involved will likely be cleaned out and reshuffled.
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