In a case that could stir more trouble for Indian public sector banks, the Punjab National Bank has discovered suspicious transactions worth $1.77 billion (Rs.11,300 crore) at a Mumbai branch. PNB is India’s second-largest lender with assets worth $120 billion.
The bank said that two officials from the Mumbai branch had issued illiegal LoUs (Letters of undertaking) to pull off the con. These are issued by a bank as a guarantee on behalf of a client. The client can then obtain loans and credit from other lenders based on these LoUs.
PNB had notified the Central Bureau of Investigation about the fraud in late January and also issued a notice to other banks warning them about the same.
The caution notice, as reported by Reuters is dated February 12 and addresses the chief executives of thirty banks. It said that the officials of Indian banks in branches abroad “overlooked” some central bank rules.
Although PNB did not disclose the names of the other banks, sources suggest that Axis Bank had discounted LoUs worth 40 billion rupees from the lender and that a majority of it was sold to the State Bank of India. The Union Bank and Allahabad Bank discounted LoUs worth 13 billion rupees each. None of the banks were available for comments.
On the condition of anonymity, a CBI official told Reuters that they were looking into allegations against Nirav Modi, a billionaire jeweler regarding a fraud of $44 million and that both the cases might be related. The billionaire’s Firestar Diamond denied any involvement in the case.
The government has recently announced a bailout of $14 billion for the Public Sector Banks (PSBs) since they have been struggling through a phase of bad debts over the past four years which has also slowed down the economy.