PNB working with banks to carve out a solution on LoU dues

To avoid the defaulter tag, Punjab National Bank (PNB) will reportedly work on a solution with the banks it owes Rs over Rs 13,000 crore, over the next five days.

Banks say they may approach the government and the Reserve Bank of India to intervene if the dues are not repaid by PNB. The debt is against the Letters of Undertaking (LoUs) issued in favour of Nirav Modi’s group firms and to Mehul Choksi-owned Gitanjali group firms.

In light of the scam unearthed last month, PNB owes nearly 17 other banks including Allahabad Bank (Rs 2,000 crore, State Bank of India (Rs 1,360 crore), Union Bank of India and Bank of India (Rs 1,000 crore each).

“If the state-owned PNB does not pay back the amount by March 31, Union Bank (another government owned lender) 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,” said a report by Economic Times quoting a banker that “It would be a peculiar situation because for the first time a bank would be technically described as defaulter,.”

A senior executive with one of the creditor banks said, “PNB will have to pay. We are working out a solution with it and we should get our dues in the next five days…And also ask the government or RBI to intervene as PNB has defaulted in our books and it owes us.”

Emails and calls made to PNB remained unanswered.

After the scam brokeout, Sunil Mehta, CEO and MD of PNB had said his bank will “honour all bonafide commitments under Letter of Undertakings (LOUs) and Foreign Letters of Credit (FLC) as per law of the land and directions of the regulator”.

PNB has attributed the loss arising out of the defaults by Nirav Modi and Mehul Choksi (whose clients were funded with the LoUs) as an instance of fraud. FIRs have been filed and government agencies are investigating the matter.

Since 2011, both Modi and Choksi’s firms allegedly misused the LoUs by illegally obtaining multiple LoUs from PNB and furnishing them to overseas branches of Indian banks to get loans.

Within a few weeks of the fraud coming to light, RBI banned the usage of LoU as an instrument to get credit, used only by Indian banks.

The Central Government has said that PNB has issued 41,178 LoUs since 2011. “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,” Finance Minister Arun Jaitley informed the Rajya Sabha on March 20.”

The ET report quoted a banker saying “The industry has to find a replacement for LoUs. The regulator has to spell it out. Secondly, the accounting treatment and provisioning of overdue LoUs has to be addressed. While LoU liabilities are under dispute, a disputed liability does not arise in banks’ books on account of loans and advances. A bank may have disputed liabilities due to other claims such as tax, loss of jewellery.”

Between USD 20 billion and USD 40 billion of trade finance was with LoUs. Volumes had soared in the past 7-8 years amid cheap dollar liquidity created by US Fed’s easy money policy, it added.moneycontrol

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