India's federal agency probing money laundering in fraud case at second-largest state lender PNB: Source

India's Enforcement Directorate will be investigating a case of possible money laundering at a branch of the Punjab National Bank in Mumbai.
India's Enforcement Directorate will be investigating a case of possible money laundering at a branch of the Punjab National Bank in Mumbai. PHOTO: AFP

NEW DELHI (REUTERS) - India's Enforcement Directorate, a government agency that fights financial crime, will probe the possibility of money laundering in a US$1.77 billion fraud case at the state-run Punjab National Bank (PNB) , a finance ministry official said on Thursday (Feb 15).

PNB, the country's second-largest state-run lender with assets of US$120 billion, said in a regulatory filing that the fraud, stemming from a single branch in Mumbai, benefited "a few select account holders" and that it has reported the matter to law enforcement agencies.

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.

Indian federal agents last week said they were investigating a billionaire jeweller, Nirav Modi, and others over accusations that they defrauded PNB of US$44 million. An official with the Central Bureau of Investigation (CBI) told Reuters on condition of anonymity that the cases were related.

Modi, who has not commented on the federal case so far, could not be reached for comment on Wednesday. His flagship Firestar Diamond has said it had no involvement in the case.

PNB said that other banks appeared to have lent money to customers abroad based on the fraudulent transactions. It did not name the banks or the customers.

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.

Shares in PNB, which fell 10 per cent on Wednesday, were down more than 5 per cent in early trading on Thursday.

'LETTERS OF UNDERTAKING'

PNB first notified the CBI of its discovery late last month and subsequently issued a "caution notice" to warn other lenders about the alleged fraud.

PNB has said that two junior officials at the Mumbai branch had issued illegal "letters of undertaking". Letters of undertaking (LoUs) are typically issued by a bank giving some sort of a guarantee on behalf of a company. Other lenders give credit based on the letter of undertaking issued by a bank.

PNB did not name the other banks it said had advanced money to customers based on the fraudulent transactions. BTVI news station cited unnamed sources saying that Axis Bank had discounted 40 billion rupees (US$624.4 million) worth of fraudulent LoUs from PNB and that it had sold a majority of this to State Bank of India.

India's Axis Bank said on Thursday that it had dealt in transactions that had been guaranteed with LoUs from PNB , but it had since sold those transactions.

Two other state-run banks, Union Bank and Allahabad Bank, have each discounted 13 billion rupees worth of PNB LoUs, the television channel said. The two banks did not respond to requests for comment.

PNB's caution notice dated Feb 12 and addressed to chief executives of 30 banks - a copy of which has been seen by Reuters - said officials at overseas branches of other Indian banks who extended loans based on the fraudulent letters of undertaking also "overlooked" some central bank rules.