The Reserve Bank of India (RBI) has advised Punjab National Bank (PNB) to pay up dues to banks for claims against letters of undertakings (LoUs) and also sought a detailed report on what happened between 2011 and now.
Moving into damage control mode after the LoU fraud amounting to Rs 114 billion, the banking regulator also asked all lenders to tighten their monitoring of such LoUs and enhance due diligence in issuing these letters of comfort and non-fund based activities. A top executive at a Mumbai-based public sector bank said the RBI had communicated that PNB would have to honour all its obligations related to LoUs.
A junior branch official fraudulently issued LoUs without authority on behalf of firms belonging to the Nirav Modi group — Solar Exports, Stellar Diamonds, and Diamonds R Us — for availing of buyers’ credit from overseas branches of Indian banks.
The firms were maintaining only current accounts with the branches and did not enjoy any fund or non-fund based limits.
“Besides conducting the probe, the RBI will have to investigate the loophole and ensure that the risk management systems are made more robust,” said Deepak Bhawnani, chief executive officer (CEO) of Alea Consulting, a global risk mitigation and investigative consulting firm.
Official investigations will try to investigate the labyrinth of trades and seek out genuine beneficiaries. The process of understanding the money movement, and then to figure out who is liable and who has breached the law will take time.
The SWIFT system clearly works well; however, cooperation among various departments, authorities and banks will be key to unravelling this issue, according to a former banker. Meanwhile, banks have begun to process the recall of loans extended to Nirav Modi’s units. Senior public sector bank executives said banks had agreed to recall all loans extended to entities owned by Nirav Modi in light of the alleged LoU fraud. The recall would also cover all standard loans extended to Modi entities, said a lender.
UCO Bank has direct exposure of around Rs 1 billion to Nirav Modi-owned firms, which it has recalled. United Bank of India, which has a direct exposure of about Rs 250 million, too, will recall the loan.
The next step in this process is that the company and its promoters come in for negotiations for settlement of all loans. If they present a proper repayment plan, it will be scrutinised for viability and to corroborate financial ability and timelines. But given the criminal nature of the case now, this aspect would become complex, bankers said.
Meanwhile, other banks, too, have exposure to Nirav Modi’s entities. Allahabad Bank has an exposure of about Rs 40 billion, while that of Axis Bank is Rs 30 billion and Union Bank Rs 20 billion. State Bank of India, too, has some exposure.
UCO Bank, which has claims on PNB expects it to be settled this quarter. “We have written to PNB, and it has not refuted our claims. It is PNB’s responsibility to settle the claim. We expect recovery in this quarter itself and hence, no additional provision should be needed on account of this fraud,” said Charan Singh, executive director, UCO Bank.
(With inputs from agencies)