Rs 127-billion fraud fallout: Foreign banks stop selling gold to PNB

Punjab National Bank’s (PNB’s) gold import business has taken a hit after the Nirav Modi swindle. Foreign banks are not willing to sell gold to the scam-tainted public sector bank, said sources. 

Foreign banks selling gold to PNB are not willing to take risks. Concerns about weak compliance after it was struck by fraudulent letters of undertaking (LoUs) linger, said people in the know. 

Several banks, including PNB, are nominated agencies for gold imports on behalf of traders and bullion refiners. In recent months, PNB has emerged as one of the largest gold importing banks, where it earned a margin of 1-2 per cent. 

PNB would buy duty credit certificates, also known as exim scrips, issued as incentives, from eligible exporters under the Merchandise Export from India Scheme (MEIS), which was announced in April 2015. 
 

Importers such as PNB buy these transferrable exim scrips and get credit to pay import duty. PNB would sell the gold to traders and pass on some of the benefits it was earning. 

Foreign bank sources said they feared these exim scrips would turn out to be counterfeit.



Imports of gold using exim scrips issued under MEIS started in July last year, where some intermediaries found a low-risk trade. Besides refiners who imported unrefined gold under this facility, two banks, including PNB, also got into the bullion import business. 

Thomson Reuters GFMS, which first highlighted this facility, estimates that volumes under MEIS had increased from 30 per cent of total gold imports in October 2017 to 55 per cent in December. 

PNB’s import volume of gold using exim scrips could not be ascertained, but the total imports of gold in the last six months through this route by all players are estimated at around 70 tonnes, accounting for 30 per cent of gold going into domestic use. Sources say PNB was one of the largest gold import players. 

Queries to PNB remained unanswered till the time of going to print. 

PNB’s trade finance and gold businesses have been adversely affected and Moody’s has placed its rating under watch. 

Alka Anbarasu, vice-president, financial institutions group, Moody’s Investors Service, said, “Given PNB’s standalone credit profile is under pressure, we expect the interbank market to be cautious in its dealings with the bank. We also expect the credit costs associated with the fraudulent transactions to pressure PNB’s earnings.”

The only positive, according to Moody’s, is that “the track record of the government in supporting the banks should provide foreign lenders/interbank lenders comfort against risks”.

Reflecting Moody’s perception, senior executives with foreign banks have been cautious about trade finance instruments issued by the New Delhi-based state-owned bank after the revelation of the LoU fraud at PNB. It is no longer “business as usual” for foreign banks, now conducting transactions only after stringent checks.

Risk management units of global banks have also been making enquiries with their Indian operations about the exposure and practices followed within banks and steps PNB has taken to deal with such events, said an official at the Indian operations of a foreign bank.

This risk was because the exim scrips or certificates were bought from agents and not directly from exporters. In case of any fraudulent transaction in the past by exporters, such scrips could be cancelled on a retrospective basis, which would lead to litigation and losses by banks. The supplier or foreign bank bears the risk for the importing bank, which is PNB in this case. Sources said this has resulted in foreign banks halting shipments. 
 

Sources also said none of the banks is now importing gold and the import of gold using MEIS credits has shifted to bullion refiners at much lower margins.