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  1. Nirav Modi PNB fraud case: RBI may seek banks’ non-fund exposures

Nirav Modi PNB fraud case: RBI may seek banks’ non-fund exposures

Regulators may be wary of a bigger problem cropping up after the revelation of misuse of non-fund-based banking services by entities associated with the now infamous diamantaire Nirav Modi, the promoter of diamond trading company Firestar International, and its numerous associated entities.

By: | Mumbai | Updated: February 16, 2018 6:08 AM
Nirav Modi PNB fraud case, Nirav Modi, PNB fraud case, pnb, rbi, central bank, punjab and national bank The RBI had restricted banks from issuing non-fund facilities to borrowers who do not have any fund-based facilities from any bank in India. (Reuters)

Regulators may be wary of a bigger problem cropping up after the revelation of misuse of non-fund-based banking services by entities associated with the now infamous diamantaire Nirav Modi, the promoter of diamond trading company Firestar International, and its numerous associated entities. Following the Rs 11,300-crore fraud in Punjab National Bank (PNB), the Reserve Bank of India (RBI) is expected to seek details of non-fund exposures of all banks, sources told FE, adding that lenders are already preparing the details and will share them with the RBi when called to do so. The total non-fund based exposure of PNB was Rs 85,240 crore as on December 31, 2017, 10% higher than its exposure on December 31, 2016.

According to a senior banker, the central bank’s expected move is aimed at assessing the risk in the system from the non-fund exposures of all banks. Non-fund exposures comprise facilities including letters of credit and bank guarantees where the bank does not sanction a loan to the borrower, but acts as a guarantor to the borrower for another lender. The RBI did not respond to FE on whether it has called for such information.

“We are checking our systems to ensure that all non-fund exposures are in order and there has not been any unauthorised movement of funds,” said a banker at a state-owned bank, adding that the bank plans to put in place daily vigilance on SWIFT transactions and have asked all officials to adhere to rules.

Another banker said that the department of financial services of the ministry of finance also plans to look into the non-fund books of banks. “The ministry is concerned that PNB was defrauded of more money than was being planned to be infused by the government,” the banker said.

The RBI had restricted banks from issuing non-fund facilities to borrowers who do not have any fund-based facilities from any bank in India.

However, in 2016, the central bank eased the restrictions with certain riders.

The fraud came to light after PNB accused Modi of swindling Rs 11,300 crore. In an early-morning notification to the stock exchanges, the lender said it has detected some fraudulent and unauthorised transactions at a branch in Mumbai.

According to a first information report (FIR) filed by the Central Bureau of Investigation (CBI), a deputy general manager in the bank’s Mumbai zonal office had filed a complaint with the CBI stating that Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Chinubhai Choksi, all partners of Diamond R US, Solar Exports and Stellar Diamonds, in conspiracy with officials of PNB cheated the bank and caused a loss of Rs 280.70 crore in 2017.

The branch mentioned in the FIR is the mid corporate branch, Brady House, Mumbai. The FIR mentions that fraudulent letters of undertaking were issued when the above-mentioned firms approached the bank for buyers’ credit to make payments to overseas suppliers.

Since the issue came to light on Wednesday, shares of PNB on the BSE have fallen 20.6% to Rs 128.35. This has led to an erosion of about Rs 8,077 crore of shareholder wealth. PNB’s market capitalisation was Rs 31,132 crore on Thursday against Rs 39,210 crore on Tuesday.

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