Indian banks could take a hit of more than $3 billion from loans and corporate guarantees provided to diamond companies at the center of an alleged massive fraud at the state-run Punjab National Bank (PNB), the tax department estimated.
As of March 2017, banks had extended loans and guarantees worth 176.32 billion rupees ($2.74 billion) to companies tied to billionaire jeweler Nirav Modi and his uncle Mehul Choksi, the department said in a memo seen by Reuters.
According to an internal document prepared by the tax authority on its preliminary investigation into India’s biggest bank fraud case, the loans and guarantees would have increased over the past year and the total hit to Indian banks may well exceed $3 billion.
According to a complaint by PNB, the biggest fraud in Indian banking history involved two junior officials at a Mumbai bank branch issuing “letters of undertaking” to firms linked to Modi and Choksi for them to obtain credit from overseas branches of other Indian banks.
The bank said these fraudulent transactions had taken place over a number of years and amounted to $1.77 billion.
The tax note said that none of these letters of undertaking 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”.
It said that Choksi’s Geetanjali Company and its subsidiaries, led by Choksi dealt, with 32 banks.
Among those that offered credit to Choksi and 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 said it has an exposure of $300 million as a counter-party lender, while Axis Bank, a private sector lender, has said it has sold all its exposure related to the fraud.
Modi and Choksi have not made any comment so far.
Federal police say they have both left India in early January and their whereabouts are unknown.
