In an attempt to reduce the loss of 25% of its net worth in one go, the Punjab National Bank has requested Reserve Bank of India (RBI) to allow it to provide for losses over the period of four quarters.
Returning the nearly Rs 13,000-crore Nirav Modi-Gitanjali Gems scam funds in the March-end balance sheet could wipe out more than a quarter of PNB’s net worth of Rs48,000 crore.
Such erosion in the book value would also restrict the bank’s ability to raise money in the market. While at the same time the bank expects to recover 40% of the loaned funds by various methods.
“We believe that RBI will agree to our request as there is a provision in its rule that losses can be spread over four quarters,” says a PNB representative. Also, the entire amount is still not NPA as it will happen during the course of the full year. So what we are saying that we will provide towards LoU that remains unpaid till March 31 and then subsequently in the coming quarters, they added.
“However, to smoothen the effect of such provisioning on quarterly profit and loss, banks have the option to make the provisions over a period, not exceeding four quarters, commencing from the quarter in which the fraud has been detected,” the rule says. One person close to the situation said that the central bank may give such relaxation to PNB.
In a press conference held by the PNB management on February 15, the bank had said that it was difficult to give any technical number on the amount of provisioning the bank would be required to make “right now” as the matter was under investigation.
Subsequently, in an analyst call on February 16, the management had clarified that it won’t slip under the Prompt Corrective Action rules of the regulator even if it had to pay all counterparty bank claims.
“Even if all these liabilities devolve on us and the regulator finds that no other bank is at fault and everything is fair and we have to meet these liabilities, we will not be breaching our regulatory capital requirement. The requirement for CET1 is 5.5% and we are at 8.05%,” Sunil Mehta, MD, PNB had told analysts.
The state-run lender would be stretched if it has to take on the provisioning burden alone, and that too in one quarter, believes the experts in the field.
Source: Economic Times