Nirav Modi scam: PNB may soon get a defaulter tag, first time for any bank in India

It's been well over a month since Nirav Modi's fraudulent LoU scam was unearthed at the Punjab National Bank (PNB), but the troubles for PNB are showing no sign of abatement. The beleaguered public sector lender is now staring at a shady title of 'defaulter', a first for any bank in India.

The loan default in question is the Rs 1,000 crore amount for which Union Bank of India had given credit based on the letters of undertakings (LoUs) issued by Punjab National Bank. Union Bank of India's Rs 1,000 crore exposure to PNB LoUs is due in the next few days.

According to a report in The Economic Times, if the scam-hit PNB does not pay back the amount by March 31, state-run Union Bank will have to treat PNB as a defaulter in its books, provide for the loan, and even classify the amount as non-performing asset (NPA) if auditors insist.

Union Bank MD Rajkiran Rai told the newspaper, "For us, it's a genuine claim on PNB backed by documents. It is not a fraud in our books... We will take the auditor's view. However, we don't want to list PNB as a defaulter. We are expecting some intervention from either the government or RBI so that there is a resolution by March 31."

The classification on PNB as a 'defaulter' by another bank would be an unprecedented event which could force the government and the Reserve Bank of India (RBI)to step in.

If this bizarre event does unfold, the LoUs maturing before March 31 are likely to be described as NPA.

Fugitive jeweller Nirav Modi and his uncle Mehul Choksi weren't the only ones who got LoUs from fraud-hit Punjab National Bank. State-run PNB had issued a total 41,178 Letters of Undertaking (LoUs) since 2011. Out of these, as many as 1,590 were given to Nirav Modi, Mehul Choksi and their associates, the finance ministry has said.

In the aftermath of PNB scam, the Reserve Bank of India (RBI) decided to discontinue the practice of issuance of LoUs/ LoCs (letters of comfort) for trade credits. Both these instruments were a form of credit guarantee, often used by importers to fund their overseas purchases.

In a written reply to the House on March 20, Finance Minister Arun Jaitley said that PNB has apprised that 7,672 LoUs were issued with validity of 90 days, 20,078 LoUs were issued with validity of 180 days, 11,224 LoUs were issued with validity of 365 days, and 2,204 LoUs were issued with validity of more than 365 days.

The PNB officials - who fraudulently issued the LoUs - had bypassed the CBS (Core Banking Solutions) system and used the international messaging service SWIFT which was not integrated with CBS.