Even as the multi-crore scam involving the Punjab National Bank (PNB) is still unfolding, the second largest state-run lender is starting at potential downgrades by international rating agencies.
On Tuesday, Moody’s Investor Service and Fitch Ratings warned PNB of downgrades, citing likely net worth erosion and widening losses.
Moody’s in a note said the review for downgrade will focus on three things -- the timing and quantum of the financial impact of the fraudulent transactions; any management actions taken to improve the capitalisation profile of the bank; and any punitive actions taken by the regulator on the bank.
“The primary driver for rating action is the risk of weakening standalone credit profile of PNB, as a result of a number of fraudulent transactions” through fake letters of undertakings issued by the bank to other lenders worth $1.8 billion over the past many years, Moody’s said.
Meanwhile, rival agency Fitch said in a separate note dropped enough hits that it might go ahead with a downgrade following the fraud. “Fitch Ratings has placed PNB viability rating of ‘bb’ on rating watch negative, following the large fraud reported by PNB,” the US-based agency said.
Commenting on the frauddetected at PNB, Moody’s said these “represent a contingent liability and the financial impact will be determined by the relevant laws. Nevertheless, we expect PNB will have to provide for at least a substantial portion of the exposure. As a result, its profitability will likely come under pressure, although the actual impact will depend on the timing and quantum of provisions that need to be made, as well as any prospects for recovery.”