Punjab National Bank (PNB) will soon have to take a difficult decision over the quantum of provisioning that may have to be done for the ₹12,700-crore Nirav Modi-perpetrated scam that shook the banking system in February.
This is because the PNB board is slated to meet on May 15 to approve its financial results for 2018-19, sources said.
The bank, which is listed on the bourses, is yet to take a call on whether the provision for the alleged fraud should be staggered over two quarters or four quarters, said a bank spokesperson.
Providing for the entire amount at one go will wipe out its profits and considerably weaken the balance sheet of the bank and, is, therefore, not an option for the senior management, the spokesperson added.
Much would depend on the guidance that the RBI has provided in this regard, according to banking industry observers.
Accounting principles and standards globally provide that once a fraudulent action takes place, it should be provided for in the books of accounts immediately. This principle is, however, contingent on the fact that the transaction is fraudulent.
Expert take
The RBI may override the established accounting principles in the interest of the financial ecosystem. It may allow PNB to stagger the provisioning given the unique situation, Reshmi Khurana, Managing Director and Head of South Asia at Kroll investigations and disputes practice, told BusinessLine . As the investigation is still ongoing, people may take a conservative view and wait for the investigation to get fully resolved, she said.
“I don’t think it will be either end of the spectrum where there will be either zero provisioning or 100 per cent provisioning. Some degree of proportionality and reasonableness will have to be applied. It’s a hard one to predict. The real world is a bit more complex than accounting principles,” said Reshmi.
She also said there is still some uncertainty on whether all Letters of Undertaking have matured or not.
Forensic audit
Meanwhile, BDO India, which was exclusively appointed by PNB in February to conduct a forensic audit, is yet to submit its report, it is learnt.
BDO was tasked with undertaking a forensic audit in respect of five specified firms of diamantaire Nirav Modi. There was no specific mandate for any forensic audit of the Mehul Choksi-led firms.