PNB flags over Rs 2,400 crore loan fraud tied to SREI accounts, makes full provision

State-owned Punjab National Bank (PNB) said on Friday that it has reported a borrowing-related fraud of Rs 2,434 crore to the Reserve Bank of India, linked to the former promoters of SREI Equipment Finance Ltd (SEFL) and SREI Infrastructure Finance Ltd (SIFL). The disclosure, made in a stock exchange filing on Friday, underscores the mounting scrutiny on non-performing assets in the banking sector and signals the bank's intent to address bad loans proactively.

The fraudulent exposure includes a loan account of Rs 1,241 crore for SREI Equipment Finance and Rs 1,193 crore for SREI Infrastructure Finance, according to the filing. Punjab National Bank stated it has made provisions for the entire outstanding amount, reflecting a cautious approach as regulatory oversight tightens.

Both companies were resolved under the Corporate Insolvency Resolution Process, carried out by the National Company Law Tribunal (NCLT). As per the SREI Group's website, SREI Infrastructure Finance entered the industry in 1989, primarily as a financier for construction equipment, but eventually faced insolvency proceedings initiated in October 2021.

The Reserve Bank of India had earlier superseded the boards of SREI Infrastructure Finance Ltd. (SIFL) and SREI Equipment Finance Ltd. (SEFL), citing governance lapses and repayment defaults totalling around Rs 28,000 crore. Following the NCLT's approval of the National Asset Reconstruction Co. (NARCL) resolution plan in August 2023, the boards of the affected entities were reconstituted.

Punjab National Bank’s provisions as of the September quarter stood at Rs 643 crore, marking an increase both year-on-year and quarter-on-quarter. The lender reported an improved Provision Coverage Ratio (including technical write-offs), which rose by 24 basis points year-on-year to 96.91% in the second quarter, a metric closely tracked by analysts to gauge asset quality.

Shares of Punjab National Bank closed 0.5% lower at Rs 120.35 on the BSE prior to the fraud disclosure, compared to a 0.4% decline in the benchmark BSE Sensex. The stock has gained 17% since the beginning of the year.

PNB scam with Mehul Choksi, Nirav Modi

Previously, Punjab National Bank (PNB) stunned the country by disclosing a massive fraud at its Brady House branch in Mumbai in 2018, initially estimated at Rs 13,500 crore and later revised to about s 13,850 crore. The scam was orchestrated by celebrity jeweller Nirav Modi and his uncle Mehul Choksi, then managing director of Gitanjali Gems, and went on to become one of India’s biggest banking frauds.

The fraud was carried out through the misuse of Letters of Undertaking (LoUs), a banking guarantee meant to help firms raise short-term overseas credit for trade transactions. With the alleged collusion of bank officials, the accused bypassed internal controls, obtained LoUs without collateral or proper authorisation, and kept the transactions off PNB’s core banking system. Between 2011 and 2017, over 1,200 LoUs were issued to companies linked to Nirav Modi and Mehul Choksi, while only a small fraction were legitimate.

A key vulnerability lay in the bank’s use of the SWIFT messaging system, which was not integrated with its internal software. This allowed funds to be routed abroad without triggering alerts. The loans were repeatedly rolled over, masking the growing exposure for years.

The fraud came to light in January 2018, prompting PNB to alert the RBI and lodge complaints with the CBI, which soon launched raids and investigations. The scam exposed deep regulatory and auditing failures and triggered sweeping reforms, including tighter oversight, better system integration and stricter controls on trade finance instruments.