Modi-Choksi case: $1.9 billion of LoUs honoured, says PNB’s Sunil Mehta

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Mumbai | Published: April 28, 2018 5:42:58 AM

“These have been paid and the ones maturing in April have been honoured. The total amount that has been paid out is about $1.9 billion of $2.07 billion,” PNB's Sunil Mehta added.

LoUs, now banned by the Reserve Bank of India (RBI), were issued as an undertaking that the issuer will honour a lender’s obligations if the borrower fails to do so.LoUs, now banned by the Reserve Bank of India (RBI), were issued as an undertaking that the issuer will honour a lender’s obligations if the borrower fails to do so.

Punjab National Bank (PNB) has honoured letters of undertaking (LoUs) related to transactions by defaulters Nirav Modi and Mehul
Choksi worth $1.9 billion (Rs 12,680 crore). Banks that were owed money by the lender have been paid, non-executive chairman Sunil Mehta told FE, adding that the remaining LoUs will be honoured on maturity. Mehta said around Rs 6,500 crore worth of LoUs had matured by the end of March.

“These have been paid and the ones maturing in April have been honoured. The total amount that has been paid out is about $1.9 billion of $2.07 billion,” Mehta added. LoUs, now banned by the Reserve Bank of India (RBI), were issued as an undertaking that the issuer will honour a lender’s obligations if the borrower fails to do so. While bank guarantees are internationally-accepted instruments, LoUs were mostly issued by banks in India and used by importers to raise money from foreign branches of Indian banks.

According to Mehta, since the number of LoUs issued fraudulently were substantial, the bank had to go back a number of years to make sure they have been reconciled.

“We also wanted to make sure whatever they had done there was prima facie kosher so that at least we were not violating any local regulations by honouring those,” he said.

PNB, Mehta said, has started linking its SWIFT system with the core banking system and will complete the process by April 30. “The way you do it is on a module-by-module basis; so we started the whole process soon after and we have committed that it will be complete by April 30. Every module has to be retested to validate that the module is working and that process is under way,” he added.

Mehta explained that while the bank had allocated a lot of its resources to tackle the damage following the fraud,its credit growth has not taken a beating in the March quarter of FY18. “Credit growth so far has been in the region of 10% for FY17-18 and that is good in terms of industry average,” he said, adding that while there was a little bit of a flutter in deposits when the fraud was disclosed, its current account and savings account deposits (CASA) as a percentage total deposits is 43.9%.

RBI data showed that growth in non-food bank credit dropped to 10.5% year-on-year during the fortnight ended March 30 from 11.39% in the previous fortnight.

“Our deposits have also grown. Maybe there was a few thousands of crore of deposits that should have come but we are at a very comfortable deposit growth,” Mehta said.

In February, PNB had disclosed that it was duped by companies associated with Modi and Choksi aided by a few junior officers of the bank. According to the lender’s complaint to investigating agencies, the junior officers had been issuing fraudulent LoUs without registering them on the bank’s books.

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. In subsequent communications and hearings with the investigating agencies, the quantum of the fraud was revised to Rs 13,000 crore.

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