Fraud in India’s Second Largest Bank Expanding

Punjab National Bank, India’s second-largest government-owned lender, has said that the quantum of fraud uncovered at one of its Mumbai branches earlier this month is expected to rise by over $204 million (over Rs1,300 crore) from the $1.77 billion estimated till now.

“In continuation to our filing with stock exchanges on 14.02.2018, we have to inform that quantum of reported unauthorized transactions can increase by $204.25 million (approx),” it said in a filing to the stock exchanges late in the night on Feb. 26, Quartz reported.

On Feb. 14, the New Delhi-based bank had first communicated to its shareholders the uncovering of the fraud. Bank employees, in collusion with jeweler Nirav Modi and his uncle Mehul Choksi, had siphoned off large amounts over seven years.

Letters of undertaking were issued by PNB employees on behalf of the bank, based on which other lenders–Allahabad Bank, Union Bank, State Bank, and Axis Bank—extended loans to Modi and Choksi. However, these loans were never repaid. In order to cover these dues, more such LoUs were issued. The whole operation remained undetected as SWIFT, the messaging service via which the LoUs were sent, is not linked to PNB’s core banking system.

A day after the scam broke out, Sunil Mehta, the managing director and CEO of PNB, said he didn’t expect the fraud to exceed the initially reported $1.77 billion. However, he had added that only the probe can ascertain this.

At present, the crime is being probed by the enforcement directorate and the Central Bureau of Investigation. The finance ministry and the Reserve Bank of India, too, have stepped in to control the damage. Meanwhile, Modi and Choksi are on the run and remain untraceable.

Meanwhile, bank stocks Tuesday fell by up to 7% as investor sentiments remained weak amid fresh disclosures by scam-hit Punjab National Bank.

Bank of India shares slumped 7.18%, IDBI 6.78%, Indian Bank 3.66%, UCO Bank 2.42% on BSE. The scrip of Bank of Maharashtra fell by 1.78%, Bank of Baroda 1.63% and Allahabad Bank 0.77%.

“The banking index was the major culprit today, courtesy to yet another negative news flow with regards to PNB,” said Sameet Chavan, chief analyst-technical and derivatives at Angel Broking.