Loans worth ₹8,000 crore to Nirav-Choksi firms also turn toxic

The ₹12,700 crore Letters of Undertaking (LoU) fraud at the Punjab National Bank (PNB) could punch a bigger hole in India’s banking system as the closure of Nirav Modi and Mehul Choksi’s jewellery businesses by investigative agencies, is likely to result in another ₹8,000 crore of loans extended to them by banks turning into non-performing assets (NPAs).

According to Reserve Bank of India (RBI) guidelines, banks have to write off the entire loan amount once a fraud has been reported. So, the entire $2 billion exposure of the country’s second largest bank PNB through LoUs issued in favour of Nirav Modi group firms will have to be booked as an NPA. Now, banks are preparing for another ₹8,000 crore or about $1.2 billion in bad loans, taking the total damage to about $3 billion.

ICICI Bank leads the consortium of lenders to Choksi's Gitanjali Gems. The total amount of bank loans to Gitanjali stands at around ₹5,300 crore. ICICI Bank has an exposure of ₹500 crore . However, Punjab National Bank has the largest exposure to the Gitanjali group.

Bank loans to Nirav Modi’s firms — Firestar International Private Limited and Firestar Diamond International Private Limited — stand at about ₹2,500 crore.

Most banks have appraised their boards about their exposure to these companies. Bankers said the loans to these companies were already at the second category of special mention accounts (SMA-2).

If a loan repayment is due for over 60 days but less than 90 days, the account is accorded SMA-2 status.

If the dues remain unpaid for 90 days, it is classified as non-performing.

Shops shut

Gitanjali Gems sold jewellery under brands such as Gili, Nakshatra, Asmi and Sanjini.

Nirav Modi’s stores as well as those operated by Mr Choksi’s Gitanjali Gems shut shop across the country after raids by investigative agencies.

Mr. Modi and Mr. Choksi are the prime accused in the PNB fraud and have left the country.

“Since all the shops are now closed, their business is definitely hit and they are not in a position to repay their debt. This would mean bank exposure to these entities will have to be classified as non-performing,” said a chief executive of a bank.

On February 14, 2018, PNB, the second largest lender of the country, informed stock exchanges about the fraudulent transactions of $1.8 billion or ₹11,500 crore in which unauthorised letters of undertakings were issued to secure overseas credit.

Later, the bank said the amount of fraudulent transactions could go up by another $204.25 million or ₹1,130 crore, taking the total money involved in the scam to $2 billion.

The Enforcement Directorate, which conducted searches at several premises of Nirav Modi and Gitanjali Gems across the country immediately after the scam came to light, has seized assets over ₹5,000 crore, sealed a gamut of properties and frozen several bank and demat accounts of Mr Modi and Mr Choksi.

In a recent letter to the PNB management, Mr Modi had said the search and seizure operations has “jeopardized our ability to discharge the dues of the group to the banks.”

CBI arrests Vipul Chitalia

In a major breakthrough, the Central Bureau of Investigation on Tuesday arrested Vipul Chitalia, the vice-president (banking operations) of Mehul Choksi’s Gitanjali Group of companies, in connection with the Punjab National Bank fraudulent transactions.

Mr. Chitalia was produced before a Mumbai court that granted his custody to the CBI till March 17.