Rs 130-bn fraud hasn't impacted our ability to lend: PNB MD & CEO

Sunil Mehta says tough times gives one opportunity to transform the bank

Punjab National Bank is confident of recovering from the losses of Rs 130 billion scam related to Nirav Modi and Mehul Choksi group of companies, especially with some relaxations provided by the Reserve Bank of India (RBI). Listing out steps that will help the bank get back to its old position, PNB's MD and CEO Sunil Mehta tells Somesh Jha and Indivjal Dhasmana that it will soon file a recovery suit to seal assets of the firms involved in the fraud. Edited excerpts:

What makes you confident that PNB will make a recovery in six months?
 

There are a lot of underlining factors behind it. One basic factor is the dispensations given by RBI. The RBI has reduced provisioning requirement from 50 per cent to 40 per cent for accounts related to National Company Law Tribunal (NCLT) cases. For that matter, even our bank has an exposure of roughly Rs 110 billion in the first list of nine accounts and Rs 65 billion in the second list of 20 accounts. We have already made a provisioning of 50 per cent in those cases and if we get a write back of 10 per cent, we will roughly get Rs 18 billion out of the provisioning requirements. Even for the fraud, RBI has given us some forbearance so we can split it out into four quarters so that will not put a strain on my capital requirements. The most important factor is during the current financial year itself, we have mobilised capital of Rs 120 billion out of which Rs 50 billion is through QIP [qualified institutional placement], Rs 30 billion from sale of non-core assets and Rs 54.7 billion through capital infusion from the government. Even if we take the entire hit, we are back by six months. So whatsoever we have mobilised, even if it is consumed in this (fraud), we are back to our old position and it will not impact our ability to further lend.

But your money is stuck in insolvency cases.
 

Our bank is participating in NCLT proceedings, especially related to the steel sector. All these accounts are now at a resolution stage and on all these accounts, the bids are in the open domain. So we will be getting much more than what we are providing for and it will contribute to our profitability. We have got a very good portfolio of roughly Rs 570 billion as NPAs and roughly Rs 250 billion of written off amounts. With the creation of a stressed assets vertical, our recovery efforts will be strengthened to the tune that we are able to bring back profitability from these stressed accounts. The bank has a battery of roughly Rs 130 billion-Rs 140 billion worth of non-core assets which we can monetise to meet our capital requirements. So that way, Rs 120 billion we have already mobilised, we have a cushion of another Rs 100 billion available with us that will provide us enough ability to continue the growth and bounce back in six months.

What assets are you eyeing to sell in the present financial year?
 

Right now, we have not stated, which assets we are going to sell out. The numbers I just shared are about our capital position, we are not under distress to sell them. So wherever we get good valuation, we will just dispose them off.

How does the recently concluded quarter look like?
 

We will definitely register losses in the March-ended quarter. But I cannot comment on it right now because it’s too premature. Our audit is still pending so after it is completed, we can talk more. But credit growth was 9.9 per cent which is better than same period last year but less than the previous quarter and domestic deposit growth stood at 6.2 per cent.

What about operating profit?
 

We have been reporting operating profit and it will continue even in the recently concluded quarter.

You have already paid Rs 65 billion in the last quarter so will you have to provide the entire amount as losses in the January-March quarter?
 

Not necessarily. We have got the regulatory dispensations so we can split it out into four quarters. We will see. Whatsoever we will be able to absorb in this quarter, we will make the provisions for that.

So will you go by the thumb rule to provide one-fourth of the losses in each quarter?
 

We have to work it out and we will disclose these numbers when we announce the financial results.

Will you also sell your subsidiaries?
 

That option is open to us.

But you can only sell 13 per cent stakes in PNB Housing Finance till November 2019 as per the regulatory requirements.
 

It’s not necessary to sell the stake. We can enter into strategic partnership also.

What kind of strategic partnership?
 

There can be a lot of types. There are investors who may like to invest. We can unlock the value of our capital and they can become a partner into profitability. So there can be strategic partnership also.

Is there any relaxation you have sought from the RBI on the new NPA framework that is expected to further increase the provisioning requirements of all the banks?
 

That is not an issue related to PNB but to the whole industry. The RBI has not come out with any relaxation in this case and we have not asked for it.

When will you be able to recover money from assets of companies belonging to Nirav Modi and Mehul Choksi?
 

We are already in the process of filing the suits and one of the request will be to seal the assets.

Which court will you approach for recovery?
 

The lawyers will decide. We are in the process. We will file a suit for recovery. All the banks involved in the consortium will file a suit collectively for recovery.

This incident has kind of caused disrepute to the banking sector. SBI Chairman Rajnish Kumar also told us in an interview that these are tough times to be a banker. What do you have to say?
 

It's a tough time to be a banker. Of course because the customer demands and regulatory pressures are going up. So it’s tough time for bankers and I subscribe to his views. Tough times also give you opportunity to transform the bank and we are going to utilise it to transform the bank.

The morale of the employees may have been low after the fraud was reported. What steps is the management taking to allay their fears?
 

For employees' morale, we have been in touch with our people right from the beginning. Management-level meetings have taken place and we have spoken to all the deputy general managers, who are heading their zones and circles, telling them that they should hold meetings with staff. Employees should be told that it’s a 123-year-old institution with so much legacy. An act of few limited employees should not demoralise the rest of 70,000 employees. And they can contribute and definitely bring it back. And despite all the turbulence, our business has not gone down, it has gone up.

Do you feel being a scapegoat in this incident when other banks were also involved in the transactions with Nirav Modi and Mehul Choski?
 

No it’s not that way. It’s a process. But we have lived by the reputation of PNB. We have said the letters of undertaking (LoUs) were issued by the employees of PNB. We said even if they were issued fraudulently, PNB will honour its commitment because it’s the matter of reputation of the bank. Also, I will not comment on it as it is a subject matter of investigation. Meantime, to ensure other banks don’t suffer, we have taken adequate precautions and a historic step to honour all the commitments.

Your stock has gone down, even below the share price of Rs 100. What will you tell investors?
 

I can say one thing it's not only our stock but stock of the entire banking industry has gone down. It’s because of various issues like RBI regulations, its new schemes and the increased rate of interest. Last year, when recapitalisation was announced, [the stock price of] our bank bounced by 50 per cent. So if you see average level of previous financial year and this year, bank has not lost heavily. Yes, there is a dip in the value of stocks and I will request the investors to believe in the confidence of the bank.

Did the approval for loans to Nirav Modi and Mehul Choksi come to the board level?
 

These were old accounts and no new facility was given to them.

Did the previous management give approval to the loans?
 

That’s a regular process of the bank. The groups were dealing with bank since 8-10 years. It’s not only our bank but also Gitanjali group was led by consortium of ICICI  Bank and in case of Firestar International (belonging to Nirav Modi), Union Bank of India was a lead banker and we also were also leader in one case. So the credit exposure (to these groups) was taken by many banks.

But in the LoU case, did the board give its approval to the loans at any stage?
 

This is a fraud as the LoUs were not sanctioned and were unauthorised. The loans were sanctioned by lower level officials without authorisation.

And they were supposed to be authorised by whom?
 

They were supposed to be authorised at an appropriate level. Suppose, if they provide 100 per cent cash margin then the sanction levels are different. For everything there is a different delegated authority.

Do you feel other banks should also take some blame?
 

I don’t think I will be able to comment on this right now. This is a job of the investigative agencies. But we can resolve these issues as it is a subject matter of public sector banks.

Why did it take PNB such a long time to integrate SWIFT with core banking system irrespective of RBI’s directive in August 2016 which PNB said it was complying with?
 

I think there is a myth about it. It’s not only about PNB. If you see the recent RBI circular, they have instructed all banks to integrate the systems till April 30. Large number of banks have not integrated the systems because technology is an evolving process. During January, PNB migrated to Finacle 10 from Finacle 7. We had decided in 2016 that integration will happen after we move to Finacle 10. We were moving ahead but incidentally this fraud surfaced before that.

Nirav Modi has written to PNB saying his business has collapsed because the bank reported the case with investigative agencies.
 

If you do something illegal, there will always be consequences. Had he been genuine, he would have come forward, stayed back, sit across the table and resolved the issues. Anybody with bona fide intention will not flee the country. Other companies go into stress, they discuss and the issues are resolved. I think whatsoever he is saying or doing is to create news in the media and there is no concrete proposal.

Don’t you think the fraud has crippled the system since RBI has also decided to ban letters of undertaking — an important instrument for traders?
 

LoUs are not a universally accepted instrument. In international market, there is a system under UCPDC [Uniform Customs and Practice for Documentary Credits]. But LoUs are not an approved document under that. This was being practiced only by the Indian banks. But trade is taking place in countries that do not use this instrument. There are alternative instruments available — letter of credits, standby letters of credits, guarantee are available.

Has PNB’s business been impacted after the LoU ban?
 

It has not impacted us much. People have switched to alternative instruments such as letters of credit.

Do you think the previous management had a lacklustre approach in reporting the fraud, which is ongoing since 2011?
 

I don’t think so.

Did any of the board members offer to resign after the fraud came to light?
 

Not at all. The board stood with us. The board has reviewed the situation and identified the problems and taken steps to that the issues do not recur.

You said you will be aggressive in recovery now. So will you still stick to your motto of Gandhigiri or will there will a change in tactics?
 

Gandhigiri is a successful tool used by our employees to recover money. Sometimes people are not worried about legal processes but social reputation. So it’s a peaceful way of demonstrating, requesting borrowers to pay up. It creates a moral and psychological pressure.

Even in this scenario, will you continue with this?
 

It will be an additional tool. We will create stronger vertical, retaining gandhigiri as an important tool.

How do you see a recent US court ruling allowing Nirav Modi to sell his assets?
 

These companies have filed for insolvency. Taking lead, we have put up an application because the money involved must be money flown from our system. They have admitted our request and we will be able to explain our position. Our bank has become an intervener so we will able to explain that we may have stake in those assets.

Do you have sufficient resources for credit?
 

Yes. It will not impact our capability to undertake credit.

Will you lower your target for business this year?
 

We will be able to maintain the same track. Right now we are in process of strategy formulation. Last year, we had expected a 10 per cent increase in credit and hopefully we will be able to maintain that.