The Reserve Bank of India (RBI) is likely to hold a meeting with the banks affected by the Rs 129-billion scam reported by Punjab National Bank (PNB) to end the stalemate over liabilities related to fraudulent letters of undertaking (LoUs) issued in favour of the Nirav Modi and Mehul Choksi groups of companies.
“The RBI is expected to call a meeting soon to resolve the issue between the banks,” a source said, requesting anonymity.
The due date of payment by PNB for LoUs worth half the scam amount, around Rs 60 billion, falls before March 31 this year. If PNB fails to pay other banks affected by the scam, Rs 60 billion will become non-performing assets on the books of the banks collectively in the first quarter of 2018-19.
The Indian Banks’ Association (IBA) has held various rounds of meetings to reconcile claims related to fraudulent LoUs, issued by two PNB employees, on behalf of a group of companies belonging to Modi and Choksi, to foreign branches of at least 30 Indian banks.
The IBA has apprised both the government and the RBI about the dispute among banks. While PNB has repeatedly said it will honour “bona fide” commitments made through the LoUs, other banks have said PNB is liable for all the transactions.
Finance ministry officials said the central government was not authorised to examine loan accounts above Rs 50 million and hence could not resolve the disputes among banks.
However, PNB Executive Director Sanjiv Sharan said, “The matter is being investigated. So, this cannot be inferred right now. We are on the job.”
The affected banks have said that PNB, while issuing the LoUs, has said that all “transactions are in compliance with the RBI guidelines for trade credits”.
“The PNB has made this assurance while issuing the LoUs. It is liable for all the transactions,” a senior banker said.
Other bankers pointed to the RBI’s master circular on guarantees, co-acceptances, and letters of credit issued in July 2015. Under those, the central bank has stated that banks need to honour commitments made under the letter of credit instrument even if transactions turn out to be fraudulent.
The RBI said banks disclaimed liability on the grounds that the transactions happened due to collusion between banks and the beneficiary but banks needed to honour the commitments otherwise it could “affect the credibility of the entire payment mechanism through banks and affect the image of the banks”.
PNB had issued LoUs, which worked like bank guarantees, to foreign branches of Indian banks to extend loans to groups of companies belonging to Modi and Choksi.
The foreign branches of Indian banks, including SBI, Allahabad Bank, Canara Bank, and Bank of India, transferred the money to PNB’s nostro account (a foreign bank account that deals in foreign currency) and the loans were given to suppliers of companies promoted by Modi and Choksi.
Under the LoU arrangement, the bank that holds the LoU (in this case, foreign branches of Indian banks) goes back to the issuer bank (PNB) and gets its due. The tenure of paying back the loan amount by PNB for the LoUs was mostly a year. The RBI has stopped the practice of LoUs after the scam.