Tackling scam: RBI says PNB can spread losses without dipping into reserves

The Reserve Bank of India (RBI) has allowed Punjab National Bank (PNB) to spread its losses of Rs 139 billion over four quarters related to the Nirav Modi-Mehul Choksi fraud, without dipping into its reserves.

“The RBI has allowed us to spread the losses without debiting the amount un-provided for in the March quarter from our reserves,” said a senior PNB executive, requesting anonymity. PNB currently has over Rs 350 billion worth of reserves, the official added. PNB has reported a Rs 139-billion fraud related to letters of undertaking and letters of credit facility availed by group of companies belonging to Nirav Modi and Mehul Choksi earlier this year.

The bank was to make full provision for losses due to fraud in the fourth quarter of 2017-18, according to RBI guidelines. PNB was staring at losses worth Rs 145 billion due to fraud in 2017-18. As a result, the Delhi-based bank had requested the RBI to allow the bank to spread its losses over four quarters, without debiting the amount from the bank’s reserves. “The RBI has given us some forbearance, so we can split it into four quarters to avoid strain on capital requirements,” PNB MD and CEO Sunil Mehta told Business Standard in an interview on Friday. According to RBI guidelines, when a bank chooses to provide for the fraud over four quarters and the full provisioning is made in more than one financial year, the bank is required to make deductions from its reserves. 

The deductions were to be made for the “amount remaining un-provided at the end of the financial year by credit to provisions,” the RBI said.

According to the  guidelines on ‘provisioning pertaining to fraud accounts’, “to smoothen the effect of such provisioning on quarterly profit and loss, banks have the option to make the provisions over a period, not exceeding four quarters, commencing from the quarter in which the fraud has been detected.”