NEW DELHI • India's Enforcement Directorate, a government agency that fights financial crime, will probe the possibility of money laundering in a US$1.77 billion (S$2.3 billion) fraud case at the state-run Punjab National Bank (PNB), a finance ministry official said yesterday.
The case is raising concerns about the possible impact across the banking sector at a time when the country is struggling to meet its economic growth targets.
PNB, India's second-largest state-run lender with assets of US$120 billion, said in a regulatory filing on Wednesday that the fraud, stemming from a single branch in Mumbai, benefited "a few select account holders".
This was an isolated case of a banking fraud and would be investigated by federal agencies, the finance official, who declined to be named as he was not authorised to speak to media, told Reuters.
Enforcement Directorate investigators yesterday raided around half a dozen of billionaire jeweller Nirav Modi's premises in Mumbai, including his home, as well as stores in New Delhi and Surat, the Press Trust of India reported.
PNB filed a complaint with the Central Bureau of Investigation late last month alleging that Mr Modi and companies linked to him fraudulently acquired PNB guarantees worth 100 billion rupees (S$2 billion) that they later used to obtain loans from abroad, said a source who asked not to be identified.
PNB said other banks appeared to have lent money to customers abroad based on the fraudulent transactions. It did not name the banks or the customers.
(The fraud) is a reminder that the bank recapitalisation scheme that the government outlined months ago doesn't solve the problems in Indian banking.
MR MIHIR SHARMA, Indian economist and columnist.
The scandal risks drying up the very loans needed for the country's small and medium-size businesses to help steer the government's ambitious growth programmes.
Indian banks, including PNB, have been stung by a surge in bad loans in the past four years, choking lending growth vital to accelerate the pace of expansion in Asia's third-largest economy.
The government recently announced a US$14 billion bailout for state banks that account for most of the US$147 billion of soured loans, but it was seen as inadequate to deal with the debt mountain.
"(The fraud) is a reminder that the bank recapitalisation scheme that the government outlined months ago doesn't solve the problems in Indian banking," said Mr Mihir Sharma, a prominent Indian economist and columnist.
"They have to bite the bullet and take on bureaucrats and the bank employee unions and actually fix banks' governance or India will struggle to maintain its growth projections."
Shares in PNB fell 10 per cent on Wednesday, and were down nearly 9 per cent yesterday. The fall had wiped 68.6 billion rupees, or 21 per cent, off PNB's market value.
PNB has said that two junior officials at the Mumbai branch had issued illegal "letters of undertaking". Letters of undertaking are typically issued by a bank giving some sort of a guarantee on behalf of a company. Other lenders give credit based onsuch letters of undertaking.
Mr Rajiv Kumar, India's top banking bureaucrat, told Bloomberg that the case is an isolated one that dates back to 2011. About 10 PNB employees have been suspended pending a CBI investigation, he said.
BTVI news station cited unnamed sources as saying that private lender Axis Bank, and state-run Union Bank and Allahabad Bank had dealt in transactions that had been guaranteed with letters of undertaking from PNB. Axis Bank later confirmed the report while the other two banks did not respond to requests for comment.