How Nirav Modi fraud spoiled Narendra Modi’s big plan: Here’s what Fitch has to say

The Rs 13,000 crore Punjab National Bank (PNB) fraud allegedly by diamond czar Nirav Modi has likely spoiled this ambitious plan by Narendra Modi, coupled with higher recognition of NPAs.

Nirav Modi fraud has likely spoiled bank recap plan by Narendra Modi, coupled with higher recognition of NPAs.

 

Last October, the Narendra Modi government announced the big bang bank recapitalisation of Rs 2.11 lakh crore to support the banking system in the country. The bank recapitalisation plan was in addition to the Insolvency and Bankruptcy Code (IBC) to fix bad loans. The aim was to clean Public Sector Banks’ books and revive slow investments in the economy. But, the Rs 13,000 crore Punjab National Bank (PNB) fraud allegedly by diamond czar Nirav Modi has likely spoiled the ambitious bank recapitalisation plan, coupled with higher recognition of NPAs.
Fitch Ratings, in its latest report, said that the Rs 2.11 lakh crore bank recapitalisation plan, which is 1.2% of the GDP, may not be enough, especially after the PNB fraud. “These banks are likely to need additional government capital, however, in particular after a recent high-profile fraud case involving USD2.2 billion in Punjab National Bank.
It also added that most of the capital injection is “likely to be absorbed by losses associated with NPL (IBC) resolution, rather than to fund new lending”. It may be recalled that the Rs 13,000 PNB fraud was uncovered just days after the government announced Rs 5,473 crore capital infusion for the bank as part of its Rs 2.11 lakh crore bank recap plan. Moreover, the fraud amount is more than double the government announced to infuse in the bank.
In February, Fitch Ratings had put PNB on ‘Rating Watch Negative’ with Viability Rating of BB’, following the fraud. The Rating Watch Negative reflects the possibility of a downgrade of PNB’s Viability Rating. Fitch had said that the massive fraud has had a capital market impact and has been a misfortune for the reputation of India’s second-largest PSU bank PNB.
Fitch, once again, refused to upgrade India’s sovereign rating for the 12th time, despite favourable economic growth outlook. It raised concerns over weak fiscal balances, the Achilles’ heel in India’s credit profile.