Fraud comes to haunt banks again, but with the hope of better recovery

Over the weekend, Punjab National Bank (PNB) declared the now bankrupt Bhushan Power and Steel as a fraud account. The company owes PNB a little over ₹4,000 crore and the lender has reported to Reserve Bank of India a fraud of ₹3,805 crore by the company, based on a forensic audit it did.

In all, the defunct steelmaker owes the banking system a whopping ₹47,150 crore. The account is in the final stages of being resolved through insolvency proceedings.

There are multiple outcomes from this fraud declaration by PNB.

On an immediate basis, the provisioning hit would be felt by the lender during the July-September quarter. PNB has provided only 50% towards the loan so far, and regulatory rules require 100% provisioning in case of fraud.

PNB’s peers would also now want to undertake their own forensic audit to ascertain what part of their exposure is kosher. A report in The Economic Times in April said the Central Bureau of Investigation (CBI) registered a first information report (FIR) against Bhushan Power and Steel and stated that accounts of IDBI Bank, Oriental Bank of Commerce and UCO Bank were also found to have fraudulent transactions.

To be sure, fraud declaration is one way of making promoters pay up as it becomes a financial crime. Irrespective of insolvency proceedings, lenders can raise the issue of the liability of promoters, if fraud is found to have happened. PNB, in its release, said it is confident of a good recovery from the account.

The bigger question, however, is whether JSW Steel would back out now or at the very least refuse to cough up the ₹19,350 crore it had bid to buy the company.

“They have the option to pull out. At the very least, they can request for a relook on the price and lower it now in light of this new information,” said a banking expert requesting anonymity.

It is not clear whether JSW Steel’s own due diligence raised some red flags for Bhushan Power and Steel when it decided to bid for the assets. Some lenders such as Bank of Baroda got frustrated with the delays in resolution and sold off the exposure.

Meanwhile, investors have punished PNB as the fraud declaration means its provisioning will rise manifold. The stock fell over 11% and soured the mood for other public sector banks too.