MUMBAI: Punjab National Bank chief Sunil Mehta put up a brave face before investors and analysts at a conference call late on Friday, saying the bank can absorb the financial fallout of what is being billed as the biggest fraud in Indian banking’s history.
“Mehta is assuming that total liability arising from the fraud will also include the Rs 1,700 crore loans given to Nirav Modi-owned companies, meaning total liability will be Rs 13,000 crore-plus if all of this goes bad. He acknowledged that the bank’s NPAs will rise in that case,” said an analyst attending the call. Representatives of the media could not join.
A back-of-the-envelope calculation suggests that if another Rs 13,000 crore is added to NPAs, total bad loans will rise to Rs 70,519 crore, up from Rs 57,519 crore reported in the quarter ended December.
This would bloat the bank’s NPAs to 14.05% of its loans, up from 12.11% of loans reported in December, assuming that the bank’s loan book stays constant at Rs 4.52 lakh crore. Under rules released in April 2017, lenders put under the so called prompt corrective action by the central bank have been asked to freeze dividend payments, open branches, hire staff and give loans to companies rated below investment grade. Eleven banks are already under the so called PCA by the regulator.
Banks are assessed on capital adequacy, asset quality and profitability. Failure to meet any of these norms could invite central bank action. Higher NPAs would mean that PNB would be closer to PCA. However, the bank is profitable as of December 2017 and so far has adequate capital. “Mehta acknowledged that the bank’s NPAs will rise because of these loans but he pointed out his core tier I ratio at 8.2% is still higher than the minimum 5.5% required, which means that he is well capitalised to meet the requirements,” said the analyst.
Participants said that the net exposure could be higher than the Rs 11,300-crore figure the bank had initially announced. “He stuck to the number earlier announced and has added loan outstanding, which means that the exposure is higher than earlier thought. This is now a rot which could spread,” said one analyst.
Analysts said that PNB would now require support from the government to ensure that there is enough capital. “Raising capital from the market is difficult now so the government will have to step in. That is now crucial for this bank’s survival,” said another analyst present in the call.