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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.