Indian banks may take more than $3.9b hit from PNB fraud: Tax dept

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Indian banks could take a hit of more than US$3 billion (S$3.9 billion) from loans and corporate guarantees provided to diamond companies at the centre of a massive alleged fraud at the state-run Punjab National Bank (PNB), the tax department has estimated.

As of March last year, banks had extended loans and guarantees worth 176.32 billion Indian rupees (S$3.59 billion) to companies tied to billionaire jeweller Nirav Modi and his uncle Mehul Choksi, the tax department said in a note.

Since then, the loans and guarantees would have increased over the past year and the total "hit" to Indian banks "may well exceed" US$3 billion, according to an internal note prepared by the tax authority on its preliminary investigation into India's biggest bank fraud case.

A complaint by PNB said the biggest fraud in Indian banking history involved two junior officials at a Mumbai bank branch issuing "letters of undertaking" to firms linked to Mr Modi and Mr Choksi for them to obtain credit from overseas branches of other Indian lenders.

The bank said these fraudulent transactions had taken place over a number of years and amounted to US$1.77 billion.

None of these letters of undertaking - essentially credit guarantees - were recorded on the bank's internal software system and instead were transmitted through the Swift interbank messaging system, "thus avoiding early detection of fraudulent activity", the tax note said.

It said Mr Choksi's Gitanjali Gems and its subsidiaries led by Mr Choksi dealt with 32 banks.

Among those that offered credit to Mr Choksi and Mr Modi, famous for his chain of stores stretching from New York to Beijing, were the Union Bank of India, Allahabad Bank and Axis Bank, the tax note said.

Union Bank of India, also a state-run lender, said on Friday it has an exposure of US$300 million as a counter-party lender.

Axis Bank, a private-sector lender, has said it has sold all its exposure related to the fraud.

Among the findings of the tax department was that several firms in which Mr Modi and his uncle were involved had people of limited means listed as majority partners.

Those people were not identified in the tax department note.

The total loans in the three firms of Mr Modi - Stellar Diamond, Solar Exports and Diamonds R Us - was 39.929 billion Indian rupees, while total capital of the partners was 4 billion Indian rupees, it said.

It said the three firms' "trade receivables", or the amount being billed to customers, were "much higher than total turnover of the three companies involved in the fraud, which shows that goods are being sold for related party and are either over-invoiced or not coming at all".

Mr Modi and Mr Choksi have not made any comment so far.

Federal police said they both left India early last month and their whereabouts are unknown. - REUTERS