Gopika Gopakumar
Mumbai: The question of who among banks will bear the loss from the Rs11,400 crore fraud in Punjab National Bank ( PNB) is likely to be decided by settlement talks rather than litigation to preserve the credibility of the banking system, bankers and legal experts said.

“If the banks don’t settle, then it will have to be adjudicated. What is more important is that everybody takes such action which doesn’t impact the credibility of the banking system,” Rajnish Kumar, chairman, State Bank of India said in an interview. “This is not a negotiated settlement. On the basis of documents, whoever is not compliant with regulatory guidelines they should take responsibility.”

SBI has an exposure of Rs1,360 crore while Union Bank of India and UCO Bank have exposures of around Rs2,000 crore each to the Rs11,400 crore PNB fraud. Photo: PTI
On Wednesday, PNB stunned the nation by disclosing that two of its employees had fraudulently issued bank guarantees worth Rs11,400 crore to jeweller Nirav Modi and his associates to help them raise overseas credit.

SBI has an exposure of Rs1,360 crore while Union Bank of India and UCO Bank have exposures of around Rs2,000 crore each.

“As per the facts to be established, PNB may under pressure to pay to counterparty banks to save its image and proceed to recover from fraudsters. This would be a commercial decision/ settlement. In case this does not happen, then the issue will decided by the courts,” said S.D. Kelkar, former legal head, SBI.

Similarly, industry observers are also expecting a directive from the central banker, the Reserve Bank of India (RBI) to intervene in the matter and come out with a notification in this regard to safeguarding the collateral damage to the reputation of the banking industry. On Friday, RBI said that it has not directed PNB to meet its commitments to other banks.

“Inter se disputes amongst banks on liability issues arising out of PNB fraud in most likelihood should be settled amongst banks only with or without the intervention of regulator,” said Rajesh Narain Gupta, managing partner of SNG & Partners.

“It would be catastrophic for the banking industry in India if in given situation a bank is permitted to deny liability owed to fraud in domestic and global context. It’s a collective operational and governance failure including of internal controls.”

A PNB official said that other banks did not do their due diligence. “There is a dispute. Banks are making claims and want PNB to pay up. Yes we admit, our processes didn’t work as they were supposed to. But processes have failed at other banks also. The banks did not do the due diligence and see the purpose for which these loans were used by the borrower,” said an official at PNB, who did not wish to be identified. “We have said that we will meet our bona fide commitments. But we need to be sure that there was no flouting of rules at the other banks. The Reserve Bank of India and the government will have to step in and tell us how the matter has to be settled among the banks. There has to be some kind of arbitration,” the official added.

He pointed out that the investigation by the agencies is likely to be a long drawn process and banks may arrive at a settlement before that