You are here: Home » Finance » News » Banks
Business Standard

Rs 127-billion fraud fallout: Foreign banks stop selling gold to PNB

In recent months, PNB has emerged as one of the largest gold importing banks, where it earned a margin of 1-2 per cent

Rajesh Bhayani & Abhijit Lele  |  Mumbai 

Vipul Ambani
A special CBI court on Monday sent Vipul Ambani of Nirav Modi’s Firestar Diamond and five others to judicial custody till March 19 Photo: PTI

Punjab National Bank’s (PNB’s) business has taken a hit after the swindle. are not willing to sell gold to the scam-tainted public sector bank, said sources.

selling gold to PNB are not willing to take risks. Concerns about weak compliance after it was struck by fraudulent letters of undertaking (LoUs) linger, said people in the know.

Several banks, including PNB, are nominated agencies for gold imports on behalf of traders and bullion refiners. In recent months, PNB has emerged as one of the largest gold importing banks, where it earned a margin of 1-2 per cent.

PNB would buy duty credit certificates, also known as exim scrips, issued as incentives, from eligible exporters under the Merchandise Export from India Scheme (MEIS), which was announced in April 2015.

Importers such as PNB buy these transferrable exim scrips and get credit to pay import duty. PNB would sell the gold to traders and pass on some of the benefits it was earning.

Foreign bank sources said they feared these exim scrips would turn out to be counterfeit. ALSO READ: PNB fraud going on since 2010, CBI tells court: Top 10 developments Imports of gold using exim scrips issued under MEIS started in July last year, where some intermediaries found a low-risk Besides refiners who imported unrefined gold under this facility, two banks, including PNB, also got into the bullion import business.

Thomson Reuters GFMS, which first highlighted this facility, estimates that volumes under MEIS had increased from 30 per cent of total gold imports in October 2017 to 55 per cent in December.

PNB’s import volume of gold using exim scrips could not be ascertained, but the total imports of gold in the last six months through this route by all players are estimated at around 70 tonnes, accounting for 30 per cent of gold going into domestic use. Sources say PNB was one of the largest players.

Queries to PNB remained unanswered till the time of going to print.

PNB’s and gold businesses have been adversely affected and Moody’s has placed its rating under watch.

Alka Anbarasu, vice-president, financial institutions group, Moody’s Investors Service, said, “Given PNB’s standalone credit profile is under pressure, we expect the interbank market to be cautious in its dealings with the bank.

We also expect the credit costs associated with the fraudulent transactions to pressure PNB’s earnings.”

ALSO READ: PNB fraud going on since 2010, CBI tells court: Top 10 developments

The only positive, according to Moody’s, is that “the track record of the government in supporting the should provide foreign lenders/interbank lenders comfort against risks”.

Reflecting Moody’s perception, senior executives with have been cautious about instruments issued by the New Delhi-based state-owned bank after the revelation of the LoU fraud at PNB. It is no longer “business as usual” for foreign banks, now conducting transactions only after stringent checks.

Risk management units of global banks have also been making enquiries with their Indian operations about the exposure and practices followed within banks and steps PNB has taken to deal with such events, said an official at the Indian operations of a foreign bank.

ALSO READ: How loopholes in PSBs' systems were flagged but never fixed until PNB fraud

This risk was because the exim scrips or certificates were bought from agents and not directly from exporters. In case of any fraudulent transaction in the past by exporters, such scrips could be cancelled on a retrospective basis, which would lead to litigation and losses by banks. The supplier or foreign bank bears the risk for the importing bank, which is PNB in this case. Sources said this has resulted in foreign banks halting shipments.

Sources also said none of the banks is now importing gold and the import of gold using has shifted to bullion refiners at much lower margins.

First Published: Tue, March 06 2018. 02:01 IST
RECOMMENDED FOR YOU