This is the impact of Neerav Modi and few other diamond jewellers’ act. The entire banking system in the country is likely to take a hit of Rs 20,000 crore due to the LoU scam which had been masterminded by Neerav Modi and others. First came to limelight was the PNB’s Rs 11000 crore LoU scam. However, now it is being said that the scam amount may cross Rs 20,000 crore.

Meanwhile, Moody’s Investors Service has today placed under review for downgrade Punjab National Bank’s (PNB) local and foreign currency deposit rating of Baa3/P-3 and foreign currency issuer rating
At the same time, Moody’s has placed the bank’s Baseline Credit Assessment (BCA) and adjusted BCA of ba3 and the Counterparty Risk Assessment (CRA) of Baa3(cr)/P-3(cr) under review for downgrade.


The primary driver for today’s rating action is the risk of weakening of the bank’s standalone credit profile, as a result of the discovery of a number of fraudulent transactions. On 14 February 2018, PNB announced to the Indian stock exchange that the bank had discovered some fraudulent
and unauthorized transactions amounting to Rs113.9 billion ($1.8 billion).

The fraudulent transactions represent a contingent liability and the financial impact will be determined by the relevant law in India (Baa2 stable). Nevertheless, Moody’s expects that PNB will need to provide for at least a substantial portion of the exposure. As a result, the bank’s profitability will likely come under pressure, although the actual impact will depend on the timing and quantum of provisions that need to be made, as well as any prospects for recovery.

The fraudulent transactions represent about 230 basis points of the bank’s risk-weighted assets as of 31 December 2017. As such, PNB’s capital position would deteriorate markedly, and fall below minimum regulatory requirements, if the bank is required to provide for the entire exposure.
Consequently, PNB may need to raise capital externally — mainly from the government — to comply with the minimum Basel III capital requirement of an 8% common equity tier 1 (CET1) ratio by 31 March 2019.

The bank reported a CET1 ratio of 8.05% in the quarter ended 31 December 2017. Since the announcement of the fraudulent exposure, PNB’s share price has fallen by about 30% as of the end of 19 February 2018, limiting the bank’s access to the equity capital markets.

The discovery of the fraudulent transactions also highlights the weak operational controls and corporate governance at the bank. The fraudulent letters of undertaking for raising buyers credit had been
transmitted via the SWIFT channels without obtaining the approval of the competent authority or necessary legal documentation, and were not entered into the bank’s core banking system.

The review for downgrade will focus on: (1) the timing and quantum of the financial impact of the fraudulent transactions, (2) any management actions taken to improve the capitalization profile of the bank, and (3) any punitive actions taken by the regulator on the bank.

Moody’s assumes a very high probability of government support for PNB in times of need, resulting in a three-notch uplift to its deposit and issuer ratings from its BCA. In the review for downgrade, Moody’s will also assess government support for the bank’s deposits and senior unsecured debt.

Given the review for downgrade, Moody’s will unlikely upgrade PNB’s ratings over the next 12-18 months.

Punjab National Bank, headquartered in Delhi, reported total assets of Rs 7.7 trillion at 31 December 2017.