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Fitch downgrades Punjab National Bank's viability rating in wake of Nirav Modi scam

The move was based on rating agency's assessment of how losses resulting from over Rs 14,000 crore fraud will affect the bank's financials. Fitch also fears that the potential losses will largely consume the recapitalisation money.

twitter-logo BusinessToday.In        Last Updated: April 11, 2018  | 10:23 IST
Fitch downgrades Punjab National Bank's viability rating from BB to BB-

Fitch Ratings on Wednesday downgraded the viability rating of scam-hit Punjab National Bank from BB to BB-. The move was based on rating agency's assessment of how losses resulting from over Rs 14,000 crore fraud will affect the bank's financials. Fitch also fears that the potential losses will largely consume the recapitalisation money.

Last year, the government came out with Rs 2.11 lakh crore bank recapitalisation plan to fight rising NPAs. This January, the Finance Ministry unveiled the details of Rs 88,139 crore capital infusion. Out of this, PNB got Rs 5,473 crore.
 
In a statement released on Tuesday, Fitch said: "...losses related to the fraud will act as a drag on PNB's overall credit profile over the next year or two and will immediately increase the bank's non-performing loan ratio and credit costs." The agency expects the bank to report losses in the FY 2018 and most of FY19. The bank's gross NPA may rise by at least 3 per cent by FY19.
 
The agency also believes that the PNB's risk controls are weaker than what was previously thought of since the multi-billion fraud was undetected for several years. It said: " PNB's Viability Rating reflects its weakened capitalisation and profitability due to larger-than-Fitch-expected deficiencies in management oversight and risk controls."
 
Earlier, a Finance Ministry report revealed that the fraud at PNB had begun in 2011 but the bank could detect it this year. On February 13, the PNB informed that it had detected fraudulent transactions worth Rs 11,300 crore at its Mumbai branch. The fraud was committed by issuing fake Letters of undertaking or LoUs by its two officials. LoUs are typically issued by a bank giving some sort of a guarantee on behalf of a company.
 
Fitch also said that it was uncertain whether the state-run bank's management would be able to address the fraud quickly due to the involvement of various probe agencies. "A delay may affect recoveries, creating more capital demand. PNB's ability to withstand further shocks will be greatly diminished if adequate capital replenishment does not occur by way of internal or external sources," the agency noted.
 
The downgrade isn't a surprise as the agency had warned the bank immediately after PNB reported the scam. It called the fraud a setback for banking sector in India. Not only Fitch, another rating agency Moody's also warned of possible downgrade. In a statement then, it said: "Moody's Investors Service has today placed under review for downgrade Punjab National Bank's local and foreign currency deposit rating of Baa3/P-3 and foreign currency issuer rating Baa3."
 
 
 

 

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