We don’t want to believe this but one part for sure, Nirav Modi’s fleeing the country “just in time” needs a lot of answering. The Japanese may be cringing in their seat if they see how India adopted their “Just in Time” concept! But that’s not all!
PNB raised INR 5000 Cr in Tier 1 Capital through qualified institutional placement in Dec 2017, again “just in time”! It got good participation but the same sure would not have been the case if the fraud was brought to light before that.
Also PNB saw off the Dec quarter before going public on the fraud. Jan being the first of the JFM quarter which also happens to be the final year end and the claims from the other banks hitting it hard, PNB had little choice left. It just wanted breathing space, enough time to put some of the amount on dispute; again “just in time”!
So many “just in time”, that it smells of well orchestrated event rather than a sudden realization which PNB claims!
While the above conjectures can be debated on; some more interesting questions comes up:
- An ET report says “those banks entangled in the fraud such as the State Bank of India, Allahabad Bank, Axis Bank, Union Bank of India and Bank of India claim that the funds were credited into PNB’s Nostro account so it is the bank’s liability”. How come PNB missed out on these fund credits? First understand how LOU/ buyers credit works. Say PNB sends a SWIFT message to SBI US confirming that Nirav Modi has LOU with the bank (basically PNB guarantees payment). The SBI US will pay PNB Nostro account in USD, while PNB pays off Nirav Modi’s dues in INR whenever this buyers credit/ LOU gets executed. While one can understand that such SWIFT messages were not linked to core banking and hence someone duped the system, how come the daily Nostro reconciliation did not spark an investigation on why so much of buyers credit are being executed for Nirav Modi’s firm. Should it not have triggered for a validation whether Nirav Modi’s company has been provided facility by the bank (i.e. assets have been mortgaged with the bank) or he has given full cash margin? (In general banks will ask for more than 100% cash margin for non-facility based buyers credit)
- Secondly, in general, Indian banks will have buyers credit/ LOU arrangement with its own foreign branches or else with foreign banks. The interesting puzzle is that all of these LOUs of PNB for this particular fraud were with foreign branches of other Indian banks or of PNB. Does it ring a bell? Maybe the checks & controls of foreign banks would have made it riskier for the perpetrator and hence this choice of banks?
- Thirdly, as per some reports, from 2011 to 2016, around 3000 Cr INR was defrauded and rest started from March 2017. Seems huge number of LOUs were made within a short span, sometimes dozens a day! No fingers raised???
- Fourthly, seems that PNB had wrong addresses for Nirav Modi’s firm. So when CBI went out to search as per PNBs documents, they realized that the office had shifted long back to Kamala Mills. So what happened to internal audit, mandatory verification under KYC? For so many years, no checks & balances in the bank highlighted this discrepancy? No trigger on so many LOU w/o facility?
- The Deputy Manager remained in his position for 7 years manning the same counter! Did their HR system/ process also failed? He is not supposed to be there beyond 3 years. He was able to subvert the rule without any help from very top. Is that even remotely believable?
- Lastly with so much amount in question, it is difficult to believe that vigilance, audit & internal controls all failed to detect it for 7 long years? Ironically the vigilance website of PNB bank (https://www.pnbindia.in/Vigilance.html) boasts of “Vigilance Excellence Award 2014-15”. As per their guidelines, any fraud beyond 3 Cr INR should be reported to CBI. They woke up only when it crossed 11000 Cr INR.
This fraud will now have cascading effect! Nirav Modi, Mehul Choksi’s firms are being raided, so their normal operations will now get completely disturbed. They would have taken normal loans from other banks and now that would also turn into NPA….more hits for the banks!
Now, for the data nerds, a few stats on how the fraud amount detected till date, measures up to key numbers of PNB:
- Overall: The fraud amount in question is actually a “liability” for PNB and hence its comparison with Profit figures or Capital & Liabilities is more relevant that with advances/ NPA which are related to asset products. So the fraud in question is nearly 8 times Net Profit, ~80% of Operating profit and 1.6% of overall banks ‘Capital & Liabilities’
If we break ‘Capital & Liabilities’, the picture becomes more revealing. The fraud, if has to be paid in full by PNB, would need knocking off nearly 28% of its “Reserves & Surplus“.
If we break down ‘Reserve & Surplus’, we get the different components that goes into Tier 1 & Tier 2 capital for the banks i.e. these impacts the bank’s Capital Adequacy Ratio (CAR) directly. With Risk Weighted Assets (RWA) expected to remain constant (as the fraud is impacting the liability side), a drop a Tier 1 & Tier 2 capital would mean negative impact on PNB’s CAR
The picture isn’t that encouraging if we consider the “Borrowing” which also contributes significantly to banks capital
PNB raised 5000 Cr to bolster its CAR in Dec 2017 as its trend has not been very healthy and with Basel III regulations, it is not in a very happy position. What this 11400 Cr fraud has done, it has neutralized the effect of both its own fund raise in Dec-17 and also the expected injection of fund of 5000 Cr by GoI.
Hence PNB’s claim to provide for this fraud from internal resources will come at a huge cost. It may not only put into a crisis to manage its CAR (consider the fact that RBI’s latest guidelines on restructuring/ stressed assets will force banks to push more assets under NPA, which will increase the RWA for the bank. With depleting capital, it will put a stress on PNB to manage its CAR as per regulatory need (Mar 19 deadline for Basel III full implementation- see graph below). Not surprisingly, it will also put a stress on the bank to grow its business.
To summarize, we believe that PNB CMD sounds too frivolous when he claims that it is 1 person, 1 branch phenomenon or that it can address the liabilities from internal resources (with a disclaimer sounding more like sounding the dispute bugle). In coming days, the CVC is expected to call the CMD and the PNB Vigilance head. That should be a queer meeting. No brainer, that they would discuss more on the fraud and less on the prizes they won on recent past. But going by the ‘silence’ maintained by both regulatory body and the Finance Ministry (ignoring the political rhetoric and passing the buck); we are not so hopeful of any systemic change being effected to minimize the repeat of events of such preposterous nature.
In our last article we answered, ‘Why Nirav Modi’s Are So Common In PSB Banks’. We were not really off the mark, if you have heard the latest news on Vikram Kothari. Here is quoting ET “We are talking about Vikram Kothari, who is the owner of the Rotomac pens which is now a defunct company. He had taken the loans of about Rs 485 crores from Union Bank of India and Rs 352 crores from Allahabad Bank. Vikram Kothari is untraceable now and he has not even paid nether the interest nor the loan amount”
PNB website for annual report FY1617, Quarterly report Q3 FY1718