Niral Modi's Rs 11,360 Cr Scam Is One-Third Of PNB’s Total Market Capitalisation

The Punjab National Bank (PNB) reported on Wednesday fraudulent transactions worth Rs 11,360 crore from a single branch in Mumbai. The fraud is equal to one-third of PNB’s total market capitalisation (value of the company that is traded on the stock market). The Bombay Stock Exchange (BSE) was informed through a filing by the PNB.

Unfolding the scam

On February 5, the PNB said in a statement that its preliminary investigations showed it has come across a suspected fraud amounting to Rs 280 crore. Later, it was found that it was in connection with fraudulent activities of billionaire jeweller Nirav Modi who was being probed by the federal investigation agency.

“Punjab National Bank has come across certain fraudulent Letter of Undertakings (guarantees) issued by two of its employees namely Gokulnath Shetty and Manoj Hanument Kharat at Brady House Branch Mumbai in connivance with a firm belonging to Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Chinubhai Choksi partners of M/S Diamond R US, M/S Solar Exports and M/S Stellar Diamond,” the bank had said in a statement, reported News18.

Gitanjali Gems’ said that its managing director Choksi had no dealings with two of the companies mentioned in the complaint and had retired from a third in 1999.

PNB employees allegedly made fraudulent entries in the bank’s books or recorded them by bypassing the lender’s core banking system.

The CBI’s complaint states that “public servants” misused their official position to cause financial advantage to Diamond R US, Solar Exports, Stellar Diamonds and wrongful loss of Rs 2.8 billion (Rs 280 crore) to Punjab National Bank during 2017.

On Wednesday, PNB said in its statement that the figure has reached a whopping Rs 11,360 crore. However, it has neither revealed nor clarified whether this is a separate set of transactions or linked to the earlier.

Yesterday, the bank’s shares fell 10%.

PNB has already suspended 10 employees. The fraud dates back to 2011, although it remains unclear the duration for which it lasted and how many guarantees were given.

Affect on other banks

PNB has filed a complaint with Central Bureau of Investigation amid concerns that the fraud might spread to other banks. The international branches of many Indian banks – that Livemint reports maybe as many as 30 – including SBI, Union Bank, Allahabad Bank, Axis Bank, and some foreign banks loaned money to Modi’s companies based on the fake guarantees.

“Allahabad Bank has raised claims of two tranches of $26 million each from Punjab National Bank for underwriting the letter of credit. These were due on January 25 and February 6. We want the bank to pay up as the exposure is on PNB,” said Usha Ananthasubramanian, managing director, Allahabad Bank. SBI and Union Bank of India have also raised similar claims.

However, PNB indicated in a letter to banks that it was in no mood to pay back and alleged connivance of employees at foreign branches of other Indian banks, reported The Wire.

A general manager of PNB said the letter of undertakings (LoUs) were opened in favour of branches of Indian banks for import of pearls for a period of one year, for which the Reserve Bank of India (RBI) guidelines stipulate a total time period of 90 days from the date of shipment.“This stipulation was overlooked by overseas branches of Indian banks that are also required to follow the RBI guidelines. There is clear criminal connivance of group companies of Nirav Modi and Gitanjali Gems with our branch official and also, apparently, with officials of overseas branches of Indian banks,” the letter said.

The banking system is in for a prolonged legal battle as other banks will start suing PNB over non-payment of dues and refusal to honour commitments.

Apparently, Modi has written a letter to bankers offering to repay all his dues in the next three to six months by selling his flagship company Firestar Diamond, which is valued at Rs 10,500 crore. Reports say he is ready to pay Rs 5,000 crore.

Government response

The finance ministry, in an attempt to speedily contain the crisis, issued an advisory late on Tuesday asking all banks to review all of their large exposures (or total loans to one customer). It has also asked the Enforcement Directorate (ED), which investigates frauds involving foreign currency and transactions, to probe the matter. Late on Wednesday, the ED registered a money laundering case against Nirav Modi and others on the basis of the CBI FIR.

CNN-News18 reported that government sources have informed that Nirav Modi has left India. ED sources have told the news portal that Modi is in Switzerland. Other sources say that Modi is suspected of laundering demonetised notes.

PNB MD & CEO Sunil Mehta said in yesterday’s press conference that they have the “capacity and capability” to come out of this situation. He also said that mainly international branches of Indian banks were involved in the scam.

Suspicions brew

Nishal Modi, younger brother of Nirav Modi, is also named in the money laundering case. He is married to Ishita Salgaonkar, who is the daughter of Goa industrialist Dattaraj Salgaonkar and Dipti Salgaonkar. Dipti is one of Mukesh Ambani’s sisters.

India’s banking sector in crisis

Amid the PNB scam, the country’s largest lender, SBI, wrote off bad loans worth Rs 20,339 crore in 2016-17 – the highest among public sector banks which has a collective write off of Rs 81,683 crore for the fiscal.

The figure has jumped almost three times in five years. The huge bad loans have caused SBI to register its first quarterly loss (Rs 2,416.4 crore) in 17 years.

For over three years, the RBI has been struggling to resolve its bad loan problem. In May 2016, former RBI Governor Raghuram Rajan initiated the Asset Quality Review (AQR) through which the RBI had asked the banks to report stressed loans or even non-performing ones (more details here).

It was revealed last year that only 12 accounts are responsible for about 25% of these bad loans. The gross bad debt that plagues India’s banking system as of March 2017 was at Rs 7.11 lakh crore, according to Business Standard. This means that the 12 accounts would be responsible for about Rs 1.78 lakh crore.

In October last year, the Union government unveiled a plan to infuse Rs 2.11 lakh crore into the country’s NPA-swamped public-sector banks (PSBs) over two years to boost credit and spending. This recapitalisation plan includes Rs 80,000 crore worth of recapitalisation bonds for 2017-18 and Rs 8,139 crore as budgetary support.