RBI Allows PNB To Spread Losses Over Four Quarters

The Reserve Bank of India has accepted Punjab National Bank's request to spread the losses incurred from the Rs 13,000-crore fraud over four quarters, a senior government official told BloombergQuint on the condition of anonymity.

The country's second-largest state-owned lender had written to the banking regulator after the Nirav Modi fraud case came to light, requesting that it be allowed to provision for the losses over four quarters, the official said.

PNB is staring at losses worth Rs 14,500 crore for the financial year 2017-18, Minister of State for Finance Shiv Pratap Shukla had informed Parliament. This comes after the lender informed the stock exchanges and the Central Bureau of Investigation that some of its employees had connived with companies owned by Modi and his uncle Mehul Choksi to issue fraudulent letters of undertaking to borrow funds from foreign branches of other Indian banks.

The banking regulator's decision will come as a relief to the state-owned lender which said last month that it will honour all 352 letters of undertaking and foreign letters of credit worth Rs 6,500 crore maturing with seven banks on or before March 31. The bank's profit is likely to take a massive hit for the quarter ended March.

PNB did not respond to BloombergQuint's emailed queries.

According to RBI's April 2016 guidelines on provisioning related to frauds, banks can provide for losses incurred over a period of time, not exceeding four quarters, starting from the quarter when the fraud was detected.

Also Read: PNB Should Provide For Entire Fraud Amount In Q4, Says Veteran Auditor

In the past, the central bank had allowed some banks to spread provisioning over a period of time, the official quoted above said. In 2016, Jammu & Kashmir Bank restructured loans of borrowers affected due to political unrest in the state.

“RBI can allow [banks to]...not take the entire hit in one quarter and spread it in over four which could provide some breathing space to the bank in terms of capitalisation,” Prakash Agarwal, head-financial institutions at India Ratings told BloombergQuint.

PNB also said it will honour all subsequent LoUs as and when they mature. That's certainly a loss for the bank, but the full impact may not be absorbed in one or two quarters, in case RBI provides that subvention, Agarwal said.

Fair Accounting?

Amarjit Chopra, past president of Institute of Chartered Accountants of India, said in view of the fact that PNB has agreed to honour commitments worth Rs 6,500 crore in this quarter, the loss will have to booked in this quarter itself. Spreading provisioning of losses is unfair to other players in the industry from the point of view of results comparability, he told BloombergQuint over the phone.

“It is uncertain that in which year this fraud took place. However, the day it has come to surface, the loss needs to be booked in that quarter itself. RBI, being the banking regulator, has the prerogative to allow a particular treatment to the bank, but in my view, it is contrary to the principles laid down in the accounting standards.”

Also Read: PNB Plans To Stake Claim In Insolvency Proceedings Of Nirav Modi's Company

Chopra said it would be interesting to see whether capital adequacy ratio as on March 31 is calculated taking into account the entire loss or only a fourth of the loss. “If it's one-fourth of the loss, that would mean capital adequacy ratio itself is overstated.”

Capital adequacy ratio is a measure of bank's capital calculated as a percentage of its risk weighted credit exposure.