PNB Reports ₹2,434 Crore Fraud; Stock Recovers on Full Provisioning

Introduction

Punjab National Bank (PNB), a major state-owned lender, recently disclosed a significant borrowing fraud amounting to ₹2,434 crore to the Reserve Bank of India (RBI). The fraud is linked to the accounts of the erstwhile promoters of SREI Equipment Finance Ltd (SEFL) and SREI Infrastructure Finance Ltd (SIFL). Despite the substantial amount, PNB's shares demonstrated resilience, recovering from an initial dip after the bank confirmed it had already made 100% provisions for the entire outstanding amount, signaling to investors that the financial impact had been preemptively managed.

The Fraud Disclosure in Detail

In a regulatory filing, PNB detailed the specifics of the fraud. The total amount of ₹2,434 crore is split between two SREI group entities. A fraud of ₹1,240.94 crore was reported in the account of SREI Equipment Finance Ltd, while another fraud of ₹1,193.06 crore was linked to SREI Infrastructure Finance Ltd. The bank clarified that the classification of these accounts as fraudulent was based on the findings of a forensic audit. This disclosure is part of the regulatory compliance under SEBI's listing obligations, ensuring transparency with stakeholders.

Proactive Provisioning Mitigates Impact

A critical factor in the market's measured response was PNB's assurance that it has already set aside funds to cover the potential losses. The bank stated it has made 100% provisions against the entire outstanding amount in both accounts. This proactive measure means the fraud's financial impact on the bank's profitability and balance sheet has already been accounted for in previous financial periods. For investors, this indicated that the disclosure was a procedural declaration of a legacy issue rather than a new financial threat to the bank's stability.

Background of the SREI Group Insolvency

The issues with the SREI Group are not new. In October 2021, the RBI superseded the boards of both SIFL and its subsidiary SEFL due to governance concerns and payment defaults. Subsequently, the companies were taken through the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC). The two entities had a combined financial debt of approximately ₹32,700 crore. The resolution process concluded in December 2023 when the National Asset Reconstruction Company Ltd (NARCL), a government-backed bad bank, acquired them. The SREI group has reportedly challenged the forensic audit report that formed the basis for the fraud classification, stating the matter is sub-judice.

Stock Market Reaction and Performance

Following the announcement, PNB's shares experienced initial volatility. The stock fell as much as 3.1% to ₹116.6 apiece in early trading. However, it quickly recovered and was seen trading higher at ₹120.55 later in the day, demonstrating investor confidence in the bank's handling of the situation. A look at the stock's broader performance shows a mixed but generally positive trend. While the share price has dropped nearly 5% over the past month, it has gained over 8% in the last six months and surged by more than 16% since the beginning of the year. The stock's 52-week high was recorded at ₹127.80, with a 52-week low of ₹85.46.

PNB's Financial Snapshot

The fraud disclosure comes at a time when PNB's overall financial health shows signs of improvement. For the second quarter of the financial year, the bank reported a 14% year-on-year increase in standalone net profit, which stood at ₹4,904 crore compared to ₹4,303 crore in the same period last year. Its asset quality has also improved significantly. The Gross Non-Performing Assets (NPA) ratio improved to 3.45% from 4.48% a year earlier, while the Net NPA ratio improved to 0.36% from 0.46%. In absolute terms, gross NPAs stood at ₹40,343 crore, down from ₹47,582 crore a year ago.

Key Financial Metrics

A Wider Industry Issue

Punjab National Bank is not the only lender to have flagged issues with the SREI Group. Other public sector banks, including Punjab & Sind Bank, Bank of Baroda, and Union Bank of India, had also previously declared loan frauds in connection with SREI companies. This indicates a systemic problem with the borrower, which culminated in the RBI-led insolvency proceedings.

Analysis: Why the Market Remained Calm

The market's ability to look past the headline fraud figure stems from two main factors. Firstly, the 100% provisioning meant there were no new financial shocks for the bank. The losses were already priced in. Secondly, the SREI case is a well-known legacy issue that has been undergoing resolution for years. PNB's disclosure is seen as a final step in cleaning up its books related to this specific exposure, which is a positive sign of transparent corporate governance.

Conclusion

Punjab National Bank's disclosure of the ₹2,434 crore fraud involving SREI Group highlights a legacy credit issue that the bank has now fully provided for. The stock's quick recovery underscores that investors prioritized the bank's proactive risk management and improved financial health over the negative headline. With the SREI resolution complete and provisions in place, PNB appears to be moving forward with a cleaner balance sheet, allowing it to focus on its ongoing business growth and profitability.