Scam-hit PNB may need to provide for around Rs 60 bn in losses this quarter

Bank to pay if RBI declines its relaxation plea

Punjab National Bank may have to provide for around Rs 60 billion in losses in this quarter due to the Rs 127 billion scam related to the fraudulent Letters of Undertaking (LoUs).

“Our preliminary estimates show we may have to provide for around Rs 60 billion in the balance sheet for the quarter ending on March. The due date for LoUs amounting to Rs 60 billion is falling in the present quarter. This will be a contingent liability for the bank,” said a senior executive, on condition of anonymity.

According to the government lender’s complaint to the Central Bureau of Investigation (CBI), 124 of 143 LoUs issued by the bank on behalf of the Gitanjali group of companies, promoted by Mehul Choksi, had due date up to March 31 this year. This means, if the company doesn’t pay, PNB will have to bear the entire liability. 
 

PNB had issued LoUs to foreign branches of Indian banks, which in turn transferred the loan money to the former’s nostro accounts.

The due date for most LoUs issued to the Nirav Modi group of companies also fell in the present quarter of the financial year, according to PNB’s complaint.
 

Concerned at the high provisioning in the March-ended quarter, PNB has asked the Reserve Bank of India (RBI), whether it can spread the loss over four quarters.
 

Top five public sector banks hit by fraud in 2016-17

RBI norms say: “Banks should normally provide for the entire amount due to the bank or for which the bank is liable (including in case of deposit accounts), immediately upon a fraud being detected.” 

However, banks can also provide for losses related to fraud over four quarters “to smoothen the effect of such provisioning on quarterly profit and loss… commencing from the quarter in which the fraud has been detected.” 

PNB first detected the Rs 127 billion fraud this January.If RBI agrees, the bank will have to provide for around Rs 30 billion in the present quarter. “We are confident that the RBI will agree to our request, as the regulator has made such a provision of spreading the possible losses over four quarters. Even if the regulator doesn’t agree, we will not be required to provide for the entire Rs 127 billion in the March-ended balance sheet, as the due date for many LoUs will fall in the next financial year,” the bank executive said.

PNB officials said clarity has been sought from the RBI, as the scam, pertaining to issue of fraudulent LoUs, is unprecedented in nature.