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.


Saudi Arabia seeks stable, not soaring, oil prices

Updated 22 September 2018
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Saudi Arabia seeks stable, not soaring, oil prices

  • Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday.
  • The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98

RIYADH: Oil prices rose this week on continuing market tightness. With the price rise, some Saudi-bashing has begun. Bloomberg reported that increasing prices were due to Saudi Arabia’s comfort with Brent crude above $80 per barrel. Such “analysis” is hogwash.

Due to market tightness, Brent rose to nearly $80 per barrel but deteriorated to $78.80 on Friday. WTI rose above $70 per barrel for the first time in three months and settled at $70.78 per barrel by the week closing.
The average price for Brent crude per barrel over the past five months has been between $72.11 and $76.98. As may be noted in those numbers, the Brent crude price has been resisting the psychological barrier of $80 per barrel. The fact is that, since October 2014, the Brent monthly average has never gone above $80.
The oil price outlook might be raised as a result of this upward tendency and the continuing tight oil market. For instance, with the latest numbers in hand, HSBC has revised its oil price forecast upward with Brent to average $80 per barrel in 2019 and $85 in 2020, before settling at about $75 in 2021.
Bloomberg was inaccurate about Saudi Arabia’s comfort with a Brent price above $80 per barrel. The Kingdom has never been among the bulls when it comes to oil prices. Again and again, Saudi Arabia has been a major advocate for stable oil prices, not increasing oil prices, which it views as unsustainable and damaging to the global economy. Bloomberg is also predicting that Saudi Arabia will follow its allegedly bullish nature and refrain from ramping up production to compensate for the oil lost once the US sanctions on Iran come into effect.
US Secretary of Energy Rick Perry has confirmed that Saudi Arabia, Russia and the US are well able to add enough crude oil supply into the market to compensate for Iran. Indeed, the Kingdom has begun to increase output to adjust for market needs, from 9.87 million barrels per day (bpd) in April to 10.42 million bpd in August.
The upward movement in oil prices came after strong fundamentals showed market tightness that spurred record levels of speculative traders, with nearly all betting on higher prices. The price rise also recognized that total US inventories are below the five-year average for the first time since May 2014. Oil prices have been gradually trending upward with gentle fluctuations. There have not been any steep surges or declines. There is nothing artificial about the trend. In reality, it is boringly predictable.
Last month, the International Energy Agency (IEA) reported OECD commercial crude oil inventories at 32 million barrels below the five-year average. Stocks at the end of Q2 2018 were up 6.6 million barrels versus the end of 1Q 2018, the first quarterly increase since 1Q 2017. The IEA also noted that global refinery throughputs in the second half of 2018 are expected to be 2 million barrels higher than in the first half of the year. These refined products stocks will draw down before building again in 4Q 2018.
Global crude oil inventories peaked in 2016. The OPEC+ agreement that worked for market balance was the reason for a fall in inventories. Since May 2017, global oil stocks have been on the decline and now global crude oil stocks are below the five-year average. Product stocks are also below that level, with strong demand and healthy refining margins.
Inventories have kept falling despite American producers pumping at all-time highs last month. It is only the massive flood of oil from the US which has kept crude oil prices at low levels from early 2015 to the end of 2017 — along with a resulting lack of upstream investment in the oil industry. Therefore, the IEA predicts that in 2022 spare production capacity will fall to a 14-year low.
Global oil markets are rebalancing. Oil prices started their upward momentum from the end of October 2017. They went above the psychological barrier $60 a barrel after 10 consecutive months of tireless efforts by OPEC and non-OPEC nations that started on January 2017. The market rebalancing will continue through the end of 2018, and beyond.
Such upward momentum in oil prices isn’t artificial movement because it came after many months without steep price fluctuations. In 2016, the Brent price average was $43. The 2017 Brent price average was $54, and prices just surpassed $60 in October 2017. The Brent average surpassed $70 in late March 2018 and has been hovering between $72 and $78 since. There is no evidence of a steep fluctuation or an artificial movement.
The claims of an artificial price movement have come just at the time when OPEC and the world are reaping the positive outcomes of 24 nations collaborating in output cuts that managed to successfully rebalance the oil market in a situation where global oil inventories were running at record highs. Also, these false claims came when the oil industry needs capital inflows to reactivate upstream investments for major international oil companies. Such investments are essential for the price stability that benefits oil producers and consumers globally. Low oil prices result in low investment in discovery and production of petroleum resources, which damages various industry sectors and energy needs. That leads to a vicious cycle of up-and-down price fluctuations.