PNB's FY17 fund-based exposure to jewellery sector at 0.6% of loan book

Bank of India, SBI, Canara Bank and IDBI Bank are among those that highest fund-based exposure to the sector as a percentage of total loan book among the other PSU banks

Punjab National Bank (PNB) that has been at the centre of the Rs 114 billion fraud perpetrated by Nirav Modi had a fund and non-fund based exposure (as a percentage of loan book) at 0.6% and 0.1% respectively in FY17, suggests a recent Edelweiss Securities report on the sector co-authored by Kunal Shah and Prakhar Agarwal.

Bank of India (BoI), State Bank of India (SBI), Canara Bank and IDBI Bank are among those that highest fund-based exposure to the sector as a percentage of total loan book among the public sector (PSU) during this period.

Among their private sector counterparts, IndusInd Bank with 6.1% fund-based exposure to the sector as a percentage of loan book tops the list.

Fund-based lending is where the lending bank commits the physical outflow of funds. The various forms in which fund based lending may be made by banks include loans, overdrafts, cash credit etc. Non-fund based facilities, on the other hand, are credit facilities given by the banks where actual bank funds are not involved.

The scam comes at a time when banks, especially those in the public sector, have been grappling with structural asset quality issues. Over last few days risks have got exacerbated following fraud reported by the country's second-largest lender (PNB) pertaining to Letter of Undertaking (LoUs) issued in favour of three diamond companies run by Nirav Modi.

Since February 14 when the scam / fraud came into public domain, most public sector bank stocks have lost ground with PNB tanking 25%.

"The unauthorised fraud has taken place in connivance with bank staff that casts shadow on robustness of process and expands risk beyond funded credit risks. However, we believe such instances of fraud and further pressure on asset quality will be an overhang on valuations for PSU banks (especially PNB in this case)," the Edelweiss report says.

Adding: "However, higher exposure to gems & jewellery segment does not necessarily suggest stress as the transaction being discussed is one-off, intentional and unauthorised incident."

The development has taken the sheen off gems and jewellery stocks with Gitanjali Gems slipping 40% during this period as its managing director, Mehul Choksi has also been allegedly named in the scam.

Other gems and jewellery stocks such as Tribhovandas Bhimji Zaveri (TBZ), Thangamayil Jewellery and PC Jeweller have corrected in the range of 5% - 9%. By comparison, the S&P BSE Sensex has lost 0.6% during this period. Titan Company, however, was up 0.5%.

As regards this segment, A K Prabhakar, head of research at IDBI Capital expects the branded players to be the major beneficiary of the fallout of this scam.

"I think in the post goods and services tax (GST) implementation era, branded jewellery players such as Titan will stand to gain more. That apart, the recent scam with PNB and the companies named in the gems and jewellery space will repose investors' faith in large players that have a trusted and credible management," he says.

 

Fund and non-fund based exposure to gems and jewellery sector across banks (FY17)
	In Rs billion		% of loan book
	Fund based	Non-fund based	Fund based	Non-fund based
PSU BANKS
Bank of Baroda	19.3	0.5	0.5	0
Bank of India	93.4	3.2	2.4	0.1
Canara Bank	42.5	4	1.2	0.1
IDBI Bank	25.2	27.5	1.2	1.3
Punjab National Bank	23.6	4.3	0.6	0.1
State Bank of India	158	30.2	1	0.2
Union Bank	47.8	5.7	1.7	0.2
PRIVATE BANKS
Federal Bank	1.5	-	0.2	0
HDFC Bank	71.3	12.8	1.3	0.2
ICICI Bank	44.1	10.3	1	0.2
IDFC Bank	-	3	0	0.6
IndusInd Bank	69.4	2	6.1	0.2
Karnataka Bank	5.6	0.6	1.5	0.2
Kotak Bank	44	4.4	3.2	0.3
RBL Bank	5.4	0.1	1.8	0.1
YES Bank	39.4	2.8	3	0.2
Source: Edelweiss Report