Banks face $3 bn write-off from PNB scam

Banks face $3 bn write-off from PNB scam

Context:

• The ₹12,700 crore Letters of Undertaking (LoU) fraud at the Punjab National Bank (PNB) could punch a bigger hole in India’s banking system.

Introduction:

• The closure of Nirav Modi and Mehul Choksi’s jewellery businesses by investigative agencies, is likely to result in another ₹8,000 crore of loans extended to them by banks turning into non-performing assets (NPAs).

Reserve Bank of India’s guidelines:

• According to Reserve Bank of India (RBI) guidelines, banks have to write off the entire loan amount once a fraud has been reported.
• The entire $2 billion exposure of the country’s second largest bank PNB through LoUs issued in favour of Nirav Modi group firms will have to be booked as an NPA.
• Banks are preparing for another ₹8,000 crore or about $1.2 billion in bad loans, taking the total damage to about $3 billion.

ICICI Bank:

• ICICI Bank leads the consortium of lenders to Choksi’s Gitanjali Gems.
• The total amount of bank loans to Gitanjali stands at around ₹5,300 crore.
• ICICI Bank has an exposure of ₹500 crore .
• However, Punjab National Bank has the largest exposure to the Gitanjali group.
• Bank loans to Nirav Modi’s firms — Firestar International Private Limited and Firestar Diamond International Private Limited — stand at about ₹2,500 crore.

Special mention accounts(SMA-2):

• Bankers said the loans to these companies were already at the second category of special mention accounts (SMA-2).
• If a loan repayment is due for over 60 days but less than 90 days, the account is accorded SMA-2 status.
• If the dues remain unpaid for 90 days, it is classified as non-performing.

Shops closed:

• Gitanjali Gems sold jewellery under brands such as Gili, Nakshatra, Asmi and Sanjini.
• Nirav Modi’s stores as well as those operated by Mr Choksi’s Gitanjali Gems shut shop across the country after raids by investigative agencies.
• All the shops are now closed, their business is definitely hit and they are not in a position to repay their debt.
•  This would mean bank exposure to these entities will have to be classified as non-performing.

Background:

• On February 14, 2018, PNB, the second largest lender of the country, informed stock exchanges about the fraudulent transactions of $1.8 billion or ₹11,500 crore in which unauthorised letters of undertakings were issued to secure overseas credit.
• Later, the bank said the amount of fraudulent transactions could go up by another $204.25 million or ₹1,130 crore, taking the total money involved in the scam to $2 billion.
• The Enforcement Directorate, which conducted searches at several premises of Nirav Modi and Gitanjali Gems across the country has seized assets over ₹5,000 crore, sealed a gamut of properties and frozen several bank and demat accounts.

Recent breakthrough:

• In a major breakthrough, the Central Bureau of Investigation recently arrested Vipul Chitalia, the vice-president (banking operations) of Mehul Choksi’s Gitanjali Group of companies, in connection with the Punjab National Bank fraudulent transactions.