MUMBAI, (Reuters Breakingviews) - Indian Prime Minister Narendra Modi is losing his fight against corruption. Companies tied to billionaire jeweller Nirav Modi, who is accused of being behind a $1.8 billion scam at Punjab National Bank, kept asking for credit even after New Delhi signed off a bailout for the country’s state-owned banks. The tycoon is now overseas, just like liquor baron Vijay Mallya, who fled to London amid fraud charges related to the collapse of his airline. Both are an awkward reminder of scant progress India has made in cleaning up its lenders.

The country’s biggest bank scandal has shocked both finance professionals and regular citizens. PNB says two junior officials issued letters of undertaking to get overseas lenders to extend credit to companies linked to Nirav Modi, whose creations have been worn by movie stars like Kate Winslet. The employees used the SWIFT interbank messaging system, bypassing the bank’s own controls.

The scam, which is worth almost 40 percent of PNB’s diminished market value, went undetected for around seven years and was only discovered when the customer tried to renew a letter of credit last month. Nirav Modi hasn’t commented and could not be reached by Reuters.

The latest scandal is a serious problem for the prime minister. The fact that errant borrowers are still trying to tap credit three years into a nationwide crackdown against illicit cash suggests Modi’s attempt to change the status quo through initiatives like banning big bank notes are having little impact. The perception is that the average voter has suffered while big business carries on as before.

It is also damning that the fraud went undetected even though state-backed banks’ balance sheets have been under intense scrutiny since 2015. The scandal at PNB, the second largest government-backed lender, comes just weeks after industry giant, State Bank of India, reported a rare net loss. That prompted new concerns about the extent of the rot at institutions which account for around two-thirds of India’s banking assets. New information, obtained by Reuters through a right-to-information request to the central bank, shows state banks reported loan frauds amounting to almost $10 billion in the last five financial years.

India is already struggling to extradite Mallya from the United Kingdom. Nirav Modi is also out of the country. With public outrage rising and no end in sight to the bad-debt problem, the premier’s anti-corruption stance is looking increasingly strained.

 

CONTEXT NEWS

- India’s Punjab National Bank said on Feb. 15 that it uncovered a fraud that went undetected for around seven years when a customer tried to renew a letter of credit last month.

- PNB said on Feb. 14 that it had detected "fraudulent and unauthorised" transactions worth about $1.8 billion at one of its branches in Mumbai.

- In a notice sent to other lenders on Feb. 12, PNB said that two junior officials at one of its branches in Mumbai had illegally issued “letters of undertaking” to get overseas branches of other lenders to extend credit to companies with ties to billionaire jeweller Nirav Modi.

- The bank employees used the SWIFT messaging system and bypassed the lender’s so-called “core banking system”, PNB added.

- PNB has asked Modi to come up with a formal repayment plan, the bank said at a press conference on Feb. 15.

- Nirav Modi has not so far spoken about the case and Reuters could not reach him for comment.

- PNB shares were down 5.3 percent at 121.45 rupees by 0900 GMT on Feb. 16. They have lost 25 percent of their value since the scandal broke.

 

(Editing by Peter Thal Larsen and Liam Proud)

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