Three held for PNB fraud
Court remands two bank employees, N ir av Mo di group executive to CB I custody till March 3
The Central Bureau of Investigation (CBI) has arrested a former and a current employee of Punjab National Bank (PNB) and one executive of the Nirav Modi group of companies in connection with a ~114 billion fraud at the bank.
A special court on Saturday remanded all three accused to CBI custody till March 3.
On Saturday morning, the CBI detained PNB’s former deputy manager Gokulnath Shetty, the bank’s single window operator Manoj Kharat, and Hemant Bhat, the authorised signatory for jewellery tycoon Nirav Modi’s group companies.
These are the first arrests in one of the biggest scams in the country’s banking history, allegedly premeditated by Modi and Mehul Choksi through a clutch of companies they own in collusion with some PNB employees.
According to the CBI’s remand application, the amount involved in fraudulent letters of undertakings (LoUs) issued is likely to be in the vicinity of ~60 billion, which is many times more than the ~2.8 billion in the bank’s first complaint.
The CBI remand plea said the accused were not cooperating with the investigation so their custody was required “to recover important missing documents related to the issue of fraudulent LoUs”.
The CBI also sought custody to understand the modus operandi and to locate relevant documents to identify a larger conspiracy and ascertain the magnitude of the scam.
The CBI will probe the role of other coaccused and the end-use of the huge amount of public funds diverted by them in conspiracy with other accused who were on the run and some of them were yet to be identified.
Business Standard has reviewed a copy of the CBI’s remand application submitted to the court.
During the hearing, the court observed that the offence was serious and could run into ~60 billion and that the CBI should get a fair chance to investigate the case.
Punjab National Bank’s (PNB’s) fund-based exposure to the gems and jewellery sector in 2016-17 (FY17) was 0.6 per cent of its loan book, suggests a recent report by Edelweiss Securities. Its nonfund-based exposure to the sector was 0.1 per cent of the loan book, according to the report written by analysts Kunal Shah and Prakhar Agarwal.
Bank of India, State Bank of India, Canara Bank, and IDBI Bank are other public sector banks with high fundbased exposure to the sector. In the private sector IndusInd Bank, with a 6.1 per cent fund-based exposure to the sector, tops the list. In fundbased lending, banks commit the physical outflow of funds. The various forms of fundbased lending are loans, overdrafts, cash credit etc. Non-fund based facilities, on the other hand, are credit facilities not involving the actual funds.
Public sector banks have been grappling with structural asset quality issues for some time. The situation has worsened since the revelation of the ~100-billion fraudulent letters of undertaking issued by PNB, the country’s second-largest lender, in favour of three diamond companies run by jeweller Nirav Modi.
Since February
14, when the scam was revealed, most PSB stocks have lost ground; PNB has tanked 25 per cent.
The Edelweiss report said since bank employees were involved in the fraud, it cast a shadow on the robustness of processes and expanded the risk beyond funded credit. “Such instances of fraud and further pressure on asset quality will be an overhang on valuations for PSU banks (especially PNB),” the report added.
It, however, said the high exposure to gems and jewellery was not necessarily indicative of stress. The Nirav Modi case was a one- off, international incident. The scam has also taken the sheen off gems and jewellery stocks, with Gitanjali Gems slipping 40 per cent since Wednesday, as its Managing Director Mehul Choksi was also an alleged in the scam. Other gems and jewellery stocks, such as Tribhovandas Bhimji Zaveri (TBZ), Thangamayil Jewellery, and PC Jeweller have corrected in the range of 5-9 per cent. By comparison, the S&P BSE has lost 0.6 per cent during this period. Titan Company, however, was up 0.5 per cent.
A K Prabhakar, head of research at IDBI Capital, said branded players could be beneficiaries of the scam’s fallout. “I think thanks to the goods and services tax, branded jewellery players such as Titan will stand to gain. The recent scam... will repose investors’ faith in large players that have a trusted and credible management,” he added.
Public sector banks have been grappling with structural asset quality issues for some time