The government and the Reserve Bank of India (RBI) may have to step in to avoid an unprecedented event in Indian banking. Close to Rs 1,000 crore of Union Bank of India’s exposure on account of letters of undertakings (LoUs) issued by Punjab National Bank is due in the next few days.
If the state-owned PNB does not pay back the amount by March 31, Union Bank (another government owned lender) will have to treat PNB as a defaulter in its books, provide for the loan, and even classify the amount as non-performing asset (NPA) if auditors insist.
“It would be a peculiar situation because for the first time a bank would be technically described as defaulter,” a senior banker told ET. In the event of fraud, banks are required to make full and immediate provisioning against outstanding as well as categorise the loan as NPA.