Nirav Modi fraud case: No clarity yet on the quantum of losses for PNB, other banks

Clearly, $1.77 billion is the amount that Modi and his firms borrowed since 2011 but what's unclear is the outstanding exposure and how much of it was actually repaid.

Published: 16th February 2018 04:33 AM  |   Last Updated: 16th February 2018 06:09 AM   |  A+A-

Punjab National Bank | Reuters File Photo

Express News Service

 MUMBAI: A day after the Rs 11,400 crore Nirav Modi fraud emerged, the extent of losses for Punjab National Bank and other banks remained a puzzle. Clearly, $1.77 billion is the amount that Modi and his firms borrowed since 2011. What’s unclear, though, is the outstanding exposure and how much of it was actually repaid.  

If you read between the lines, the FIR the CBI filed last month raises concerns if the entire Rs 11,400 crore or part of it was embezzled in small tranches every year. PNB, in a statement to CBI last month had categorically said “public funds to the tune of Rs 281 crore seems to have been embezzled by committing fraud...” strengthening fears that the suspended PNB officials may have diverted funds.

Many questions emerge. Chief among them is the outstanding exposure. According to PNB, the borrowing firms namely Diamonds R US, Solar Exports and Stellar Diamond raised capital in foreign currency (from foreign branches of Indian banks) based on unauthorised Letter of Understanding (LOU) that PNB employees fraudulently issued. For instance, in 2017 alone, eight fake LOUs were used to raise Rs 281 crore from the Hong Kong branches of Allahabad Bank and Axis Bank.

There are many unanswered questions in the PNB scam involving Letters of Understanding (LOUs). By nature, LOUs are short-term instruments, and if the borrower fails to repay, it becomes a default raising red flags.

Here, two things may have happened.

One, the borrower may have repaid, and that’s how the fraud remained undetected. If so, the quantum of bank losses could be minimal. But if bank officials helped divert funds, the losses could be grave.

Two, why did PNB issue LOUs with due date exceeding 330 days, against the conventional 90-day norm? The eight fake LOUs in February 2017 had due dates of January 2018.

Three, if the firms in question cumulatively borrowed Rs 11,400 crore, why is Nirav Modi ‘vaguely’ offering Rs 6,000 crore in settlement? Now that’s something the Enforcement Directorate, Sebi, RBI and CBI are attempting to crack together. Sunil Mehta, MD & CEO of PNB on Thursday clarified the bank would honour all its liabilities, but didn’t disclose the hit it may have to take.

“The amount involved is substantial...At this juncture, investigating agencies have been roped in and it will take time to ascertain the financial impact on banking system,” said Kunal Shah of Edelweiss Securities.


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