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  1. LoUs: PNB may have to take substantial liability

LoUs: PNB may have to take substantial liability

Punjab National Bank (PNB), facing a Rs 11,400-crore scandal, may have to honour at least a substantial part of its commitment on the letters of undertakings (LoUs) and foreign letters of credit (FLCs) illegally issued to firms of celebrity jeweller Nirav Modi and his uncle Mehul Choksi by one of the bank’s employees by abusing its SWIFT interbank system, two executives with banks having no exposure to such guarantees told FE.

By: | New Delhi | Published: February 21, 2018 4:14 AM
Punjab National Bank, Nirav Modi, Mehul Choksi, Nirav Modi fraud case, Sunil Mehta, Allahabad Bank, SWIFT For his part, PNB managing director Sunil Mehta has said his bank will honour all “bona fide” commitments, stopping short of owning up to the entire liability until investigations are over. (Reuters)

Punjab National Bank (PNB), facing a Rs 11,400-crore scandal, may have to honour at least a substantial part of its commitment on the letters of undertakings (LoUs) and foreign letters of credit (FLCs) illegally issued to firms of celebrity jeweller Nirav Modi and his uncle Mehul Choksi by one of the bank’s employees by abusing its SWIFT interbank system, two executives with banks having no exposure to such guarantees told FE. While a final call on this issue will have to be taken by the Reserve Bank of India (RBI) and the finance ministry, as things stand now, either entire or at least a substantial part of the Rs 11,400-crore liability seems to lie with PNB, they said. However, if the investigations reveal that the accused PNB staffer was part of a broader interbank nexus on fraudulent LoUs, the regulator and the government will have a tough task in deciding liabilities, they added.

For his part, PNB managing director Sunil Mehta has said his bank will honour all “bona fide” commitments, stopping short of owning up to the entire liability until investigations are over. PNB has also suggested that other banks didn’t do due diligence on the illegally-extended tenure of such LoUs (which were used to get short-term credit from overseas branches of other Indian banks).

However, Mehta has made it clear that the bank will honour any directive from the regulator on liabilities, while other banks concerned feel PNB must pay up the entire amount. The banks that have exposure to such guarantees include Uco Bank (Rs 2,636 crore), Allahabad Bank (Rs 2,000 crore), Union Bank of India (Rs 1,915 crore), State Bank of India (Rs 1,360 crore) and Bank of Baroda (Rs 450 crore).

“PNB may say other banks should have adhered to the RBI rules on the tenure of LoUs for the gems and jewellery sector. Even if that’s true, it is for the RBI to penalise them (other banks) for their lack of oversight but PNB can’t go back on its duty to pay back,” said a senior banker with substantial operation in northern India.

“The root cause of the fraud was the manipulation of systems by a PNB employee. Had he not sent the SWIFT messages to others, the problem wouldn’t have occurred in the first place. While the other banks should have ideally gone by any RBI rule on tenure, the fact that PNB gave the guarantee can’t be lost.”A former chief of Indian Overseas Bank said RBI and the finance ministry will ultimately have to sort it out, as only they can persuade and direct all parties concerned on liabilities.

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