PNB-Nirav Modi Scam: A Year After India’s Biggest Bank Fraud, The Pain Is Far From Over

A year later, Punjab National Bank, which was at the center of the fraud, has just about finished making provisions against what it lost; any hope of recovering the monies remains dim; and lenders continue to eye the gems and jewellery sector with caution.

PNB: Still Reeling From The Hit

For Punjab National Bank, the past year has been about trying to clean the mess left behind by the fraud.

The Reserve Bank of India had given the bank four quarters to make provisions, even though this was not considered best practice in terms of accounting standards. On Tuesday, while reporting its third quarter earnings, the bank said that it had finally finished making necessary provisions against the fraud account.

The total amount of the fraud, including direct and indirect exposure to Nirav Modi and Mehul Choksi related firms, worked out to Rs 14,400 crore, said LV Prabhakar, executive director at PNB. This includes money loaned by other banks against guarantees of PNB. The bank has made 100 percent provision against this amount, Prabhakar told BloombergQuint.

The provisions needed against the fraud amount added to the already elevated provisions against bad loans and led to four consecutive quarters of losses at the bank.

While the bank’s management said that it is continuing to pursue recoveries actively, there's no indication that long drawn-out legal processes will complete anytime soon. In September, news reports had suggested that the enforcement directorate is attempting to attach Rs 4,000 crore in overseas properties belonging to Modi and Choksi. Some domestic assets, too, have been seized but it may take some time before banks see any of this money.

Meanwhile, on Jan. 31, the National Company Law Tribunal approved a request to make 19 more people party to the case.

Collateral Damage: Bank Credit To Gems And Jewellery

While Nirav Modi and Mehul Choksi are no longer in the country, the sector they once represented continues to face the lending chill that followed the scam.

Credit to the gems and jewellery industry has moderated through most of 2018, despite a pick-up in industry-wide bank credit growth, shows data from the Reserve Bank of India.

Credit to the gems and jewellery said was hit hard by the scam, said Colin Shah, vice-chairman of the Gems & Jewellery Export Promotion Council. A year later, bankers are still to fully reimpose their trust in the industry, he said.

Anantha Padmanaban, chairman of the All India Gem & Jewellery Council, said that the lack of credit remains the most pressing issue for the sector.

Troubles were compounded by the fact that the RBI decided to discontinue letters of undertaking (LoUs) as a means of financing. Most alternative instruments command high rates of interest and are available to very few jewellers, said Padmanabhan.

Bankers acknowledge they remain cautious about lending to some segments of the gems and jewellery industry.

“Lending to diamond segment has become tighter especially in the case of banks that took a hit. These banks may commence lending after re-evaluating their internal monitoring mechanism,” said Manish Kothari, business head for commercial banking at Kotak Mahindra Bank. Kothari, however, said that other segments like jewellery retail and manufacturing have not been impacted adversely.

Kothari added that LoUs have been partly replaced by a facility known as "export packing credit". This facility involves credit provided by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods prior to shipment, on the basis of a letter of credit. Other jewellers can use banking products such as gold metal loans, said Kothari.

Broader Impact: Slowdown In Exports

The lack of credit added to already subdued demand conditions and led to a contraction in exports from this labour intensive sector.

Gems and jewellery exports contracted by 3.45 percent in the financial year until November 2018, despite a growth of 11.4 percent in total merchandise export over this period.

Gems and jewellery, which is India’s third-largest export item after petroleum and engineering goods, has also seen its share of total exports decline from 15.8 percent in 2016-17 to 13.7 percent in 2017-18. The share declined further to 12.5 percent from April until November for the current financial year.

For jewellers, there are challenges everywhere, said Shah. The ease of doing business remains low and the sector needs a comprehensive gold policy, resolution of issues pertaining to taxation of goods sent for exhibitions and easier operating procedures for customs.

Global macro economic challenges such as trade wars and continuing uncertainty over Brexit have also had a detrimental impact on exports, he said, adding that he is hopeful of an improved operating scenario in the future.