Indian central bank clamps down on credit guarantees as PNB fraud swells

FILE PHOTO: A man leaves an automated teller machine (ATM) facility of Punjab National Bank (PNB) in New Delhi, India, February 27, 2018. (REUTERS)
Updated 13 March 2018
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Indian central bank clamps down on credit guarantees as PNB fraud swells

MUMBAI: India’s central bank on Tuesday barred all lenders from issuing letters of undertaking — a form of credit guarantee at the heart of a major fraud — as embattled Punjab National Bank disclosed its total exposure in the case had risen by another $145 million.
In what has been dubbed the biggest fraud in India’s banking history, Punjab National (PNB), the country’s second-biggest state-run bank, said last month it had been defrauded of about $2 billion.
The bank has accused two jewelry groups — one controlled by diamond tycoon Nirav Modi and the other by his uncle, Mehul Choksi — of colluding with rogue bank employees to secure credit from overseas branches of Indian banks using fraudulently issued guarantees largely in the form of letters of undertaking.
Both Modi and Choksi have denied any wrongdoing. Police say they left India in January, before the initial complaint was filed, and their whereabouts are unknown.
In a notice posted on its website, the Reserve Bank of India said banks would have to stop issuing letters of undertaking and letters of comfort, with immediate effect. It said banks could continue issuing credit guarantees in the forms of letters of credits and bank guarantees, however, if certain parameters were met.
The instruments are all forms of trade finance often used by importers to fund their overseas purchases.
Bankers said letters of credit involved more paperwork and the due diligence was more stringent than letters of undertaking. Officials with direct knowledge also said letters of credit have more international acceptability, while letters of undertaking were mostly used between Indian banks.

BIGGER HIT
In a court filing on Tuesday, police said PNB had filed a new complaint alleging it had been defrauded of an additional 9.42 billion rupees ($145 million) by the Gitanjali group of jewelry companies, taking the total amount allegedly defrauded by Choksi’s group to 70.8 billion rupees ($1.09 billion).
Tuesday’s disclosure takes PNB’s overall exposure in the still unraveling fraud case to well over the $2 billion mark.
PNB said the additional amount did not involve any fraudulent letters of undertaking, but was sanctioned credit to Gitanjali group that it was recalling and adding to the total amount defrauded.
A lawyer for Choksi said he was unaware of the new allegations and declined to comment.
Law enforcement agencies had previously attributed 61.38 billion rupees of the alleged fraud amount to Gitanjali, and nearly 65 billion rupees to companies controlled by Modi.
PNB has also alleged Modi’s companies cheated the bank of a further 3.22 billion rupees, which it said was not used for the purposes for which the loans were given.
PNB did not immediately respond to requests for comment.

WHO FOOTS THE BILL?
The alleged fraud has shaken India’s banking sector, leading to a government and central bank crackdown on lenders’ systems and practices.
Finance Minister Arun Jaitley told Parliament on Tuesday a total 1,213 fraudulent letters of undertaking were issued to Nirav Modi’s companies between March 2011 and May 2017.
Banks also continue to debate who should assume liabilities from the fraud, with several lenders that have either lent to the jewelry groups based on the fraudulent PNB guarantees, or bought the so-called letters of undertaking from the secondary market, wanting PNB to compensate them.
PNB has said it will honor only “bona fide” commitments, arguing other banks that lent to the jeweller groups shared in the blame by not carrying out adequate checks.
The Economic Times daily, citing unnamed sources, reported earlier on Tuesday that PNB would honor claims by peer banks that issued credit to the jewellers, but with a few caveats.
Banking sources, however, said such an agreement was not yet a done deal.
“We are talking. But then we have not come to a conclusion,” said a senior banker, who did not want to be named, adding that PNB had not yet provided concrete assurances of repayment.
Another said that, although they were hopeful of arriving at an “amicable solution” on who takes the liability, but added it would likely need intervention by India’s central bank and the government.
Banks would need to make provisions for any potential losses from fraud when they report results for the March quarter, said the banker.
State bank shares rose on Tuesday after an easing in retail inflation allayed fears of a central bank interest rate increase in the near term, with the sector index gaining 2.3 percent.


New oil, gas projects to accelerate next year

Updated 4 min 21 sec ago
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New oil, gas projects to accelerate next year

  • Global investment in oil and gas production is expected to reach around $425 billion next year
  • Many of the new projects will be around gas, with a record number of liquefied natural gas (LNG) projects

LONDON: The number of new oil and gas projects will rise five-fold next year from a 2015 trough but overall spending is still unlikely to be enough to meet future demand, consultancy Wood Mackenzie said in a report.
Shaken by a sharp drop in oil prices in recent months, boards are generally expected to stick to spending discipline imposed following the 2014 price crash.
Global investment in oil and gas production, known as upstream, is expected to reach around $425 billion next year, according to WoodMac analyst Angus Rodger.
That compares with a total spending of $770 billion in 2014, which dropped to $400 billion in 2016 and 2017.
Although spending levels have slightly recovered since then, next year’s capital expenditure will still fall short of the $600 billion required to meet demand growth and to offset the natural decline of output from fields, Rodger told Reuters.
A handful of the world’s top oil companies, including US giants Exxon Mobil and Chevron, said they would boost spending next year as they accelerate developments of highly-productive shale fields.
But overall, companies will seek to maintain spending largely flat in order to return cash to investors after years of pain, Rodger said.
Still, deep cost cuts introduced in recent years and lower rates for drilling rigs and services mean that companies can do more with their money.
In 2019, the number of large new oil and gas projects is expected to reach up to 50, compared with 40 in 2018, and around 10 in 2015, according to WoodMac’s 2019 outlook. Large projects hold over 50 million barrels of oil or gas equivalent.
Many of the new projects will be around gas, with a record number of liquefied natural gas (LNG) projects set to get the green light in 2019.
Those include the Arctic LNG-2 in Russia, at least one project in Mozambique and three in the United States, which would together require $50 billion, according to the report.
“The stars are aligning on LNG sales contracts, corporate appetite, long-term demand and costs. But these are huge investments, and investor confidence could waver if we see signs of cost inflation, global recession and falling prices.”
The LNG projects will target 100 trillion cubic feet of gas, up from 80 tcf in 2019 and 32 tcf in 2017.
Spending could see a strong increase in 2020 if oil prices continue rising steadily and as rig costs are expected to rise, Rodger said.