PNB scam threatens to widen trust deficit

Rohit Chandavakar
Saturday, 17 February 2018

As banking stocks tumbled on the Mumbai stock exchange, India’s image took a beating abroad and the NDA government must act quickly to restore faith

India is viewed as the fastest growing market by most foreign investors and they are perhaps eager to set up shop in this country, but the big hurdle most of them talk about is of credibility and assurances of a fair and honest business environment. Politicians keep talking of MoUs that they sign with investors abroad, but somehow this investment, as mentioned in the MoUs, is not actually seen materialising according to reports by most audit agencies. The latest scam at Punjab National Bank (PNB) will cause yet another setback as the trust deficit will further widen in the minds of investors.

PNB has alleged that the Modis and companies linked with them colluded with certain officials to pull off the heist. The bank claims they used fake PNB guarantees worth $1.8 billion to obtain loans from overseas branches of Indian banks, claiming to need the cash to import pearls, according to documents made public. This has become big news in the international markets. As banking stocks tumbled on the Mumbai stock exchange, India’s image took a beating abroad.

The fraud allegedly dates back to 2011, said Rajiv Kumar, India’s top bureaucrat for the banking sector. Between then and January 2017, PNB Deputy Manager Gokulnath Shetty issued several fake PNB letters of undertaking, without any collateral, for Modi, PNB said.

The bank claims they then bypassed the lender’s internal messaging system to avoid detection, and placed instructions via the Swift global payment system, asking overseas branches of Indian banks to fork out the cash as loans, according to a document from PNB. PNB is still investigating how this played out.

PNB is in talks with other banks and liabilities will be decided after the probe, PNB Chief Executive Officer Sunil Mehta told reporters. He added that PNB will follow the regulator’s instructions on repayment. It is now important to see who will take the hit from all this. The Reserve Bank of India hasn’t responded to media enquiries.

PNB has alleged that the money was used either to retire import bills or replenish maturing lines of credit with some other banks. In its public complaint, the PNB has named the Hong Kong branches of Axis Bank Ltd and Allahabad Bank as its overseas counter-parties.

Allahabad Bank has exposure of about Rs 40 billion, while Axis Bank has a roughly Rs 30 billion exposure, a person familiar with the matter told reporters in New Delhi. Union Bank has about Rs 20 billion exposure with the rest accounted to State Bank of India, the person said, asking not to be named as the information isn’t public.

Axis Bank told the exchanges that the transactions were undertaken in the normal course of business and credited to PNB’s nostro accounts. It added it has ‘sold down all of the referred transactions’.

Government agencies and the central bank of the country must now act fast to restore at least some confidence among the investors. India does not want to be known abroad as the country of financial scams. The BJP-led NDA government must act quickly to restore faith and credibility.

Fraud dates back to 2011
† The fraud allegedly dates back to 2011, said Rajiv Kumar, India’s top bureaucrat for the banking sector. Between then and January 2017, PNB Deputy Manager Gokulnath Shetty issued several fake PNB letters of undertaking, without any collateral, for Modi, PNB said.
† The bank claims they then bypassed the lender’s internal messaging system to avoid detection, and placed instructions via the Swift global payment system, asking overseas branches of Indian banks to fork out the cash as loans, according to a document from PNB. PNB is still investigating how this played out.

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