India’s second-largest state-run bank said yesterday it had detected fraud of almost $1.8bn at one of its branches, sending its shares plunging more than 9%.
The Punjab National Bank (PNB), one of several state-owned lenders the government is trying to clean up, said transactions worth $1.77bn (Rs115.15bn) had been made “for the benefit of a few select account holders with their apparent connivance”.
It said they had occurred at a single branch in Mumbai.
“Based on these transactions other banks appear to have advanced money to these customers abroad,” the bank said, adding that the fraud had been reported to enforcement agencies for further investigation.
The bank did not give any further details, or say which lenders were affected.
Financial Services Secretary Rajiv Kumar said a Central Bureau of Investigation (CBI) probe had been launched and that 10 PNB employees had been placed under suspension.
The fraud was detected in the PNB’s Brady House Branch in south Mumbai, which is its second-biggest lending branch in the country, official sources said.
It is unclear whether the latest statement is related to an earlier allegation that billionaire jeweller Nirav Modi and others defrauded the bank of more than $40mn.
Last week, the CBI said it was looking into allegations about Modi, one of the country’s richest men.
“Earlier this month, a first information report was lodged by PNB and we raided various locations. Investigations are still ongoing,” CBI spokesman Abhishek Dayal said yesterday.
Modi is worth $1.73bn according to Forbes, placing him 85th on India’s rich list.
The 47-year-old is the founder of jewellery giant Firestar Diamond while his high-end Nirav Modi brand has stores in some of the world’s major cities.
According to sources Modi wrote to PNB and other banks that he would return the outstanding money.
Requests for comment from Modi’s spokesman went unanswered yesterday.
Firestar Diamond, one of his diamond retail companies, has previously said the earlier case was not connected to the company.
Shares in PNB plummeted 9.22% on the Bombay Stock Exchange’s benchmark Sensex index in early afternoon trade following the bank’s announcement.
Bloomberg News reported that the value of the illegal transactions amounted to eight times the bank’s net income last year.
Banking industry leader and former vice president of the All India Bank Employees Association, Vishwas Utagi, said if this was the scenario of one company pertaining to just one branch of PNB, then the situation was “truly alarming.”
“The CBI and other agencies must investigate all the members of PNB’s Credit Approval Committee and the board of directors since such scams cannot take place without the connivance at the top levels,” Utagi said.
At least three more Indian banks – two from the public sector and one private – are likely to have been caught in the fraud.
The Union Bank of India, Allahabad Bank and Axis Bank are said to have offered credit based on letters of undertaking (LOUs) issued by PNB.
An LOU is in effect a letter of comfort issued by one bank to branches of other banks, based on which foreign branches offer credit.
Udit Kariwala, senior analyst at India Ratings, said: “We are reviewing the impact of this on the bank. As of now, we’re monitoring the situation closely and based on the impact it may cause on the equity or profitability or whether it had a big dent or not, we will take a call.”
India’s government is trying to reduce the crippling debts of the country’s troubled lenders.
It recently announced a $32bn recapitalisation plan for state-owned banks to help them clean up their books.
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