Will Latest Bank Fraud Impact India ETFs?

India has been falling prey to frauds and the latest is nothing short of a nightmare for public sector banks. The issue at stake is that if investors are not confident about the government’s operations and if the inherent risks with emerging market investments actually come true, foreign investors will think twice before assuming the risks that come with their investment.

Into the Headlines

India’s public sector banks have been witnessing a decline in share prices and market value, as diamond billionaire Nirav Modi has been accused of perpetrating a fraud to the tune of INR 110 billion ($1.8 billion) along with some members of the state-run Punjab National Bank (PNB).

Nirav Modi wished to import pearls and diamonds to make jewelry, for which he planned on taking loans from overseas banks because of the lower interest rate. Such loans are initiated after a letter of undertaking (LoU) is issued by the bank to overseas banks on behalf of its customers. However, for some reason, Nirav Modi was not required to fulfill the margin requirements generally needed to get these loans sanctioned and that’s how this scam began.

In the first week of February 2018, PNB informed India’s regulators of an INR 2.8 billion fraud as the story around illegitimate LoU’s unfolded. By the next week, this figure reached INR 110 billion, dropping a bomb on the share prices of India’s banking sector.

While the roots of this fraud can be traced back to 2011, multiple Indian banks have stated their exposure to the fraud. As this fraud was developing, the government was pumping in taxpayer money to the ailing second largest state-run bank of the country, PNB. This has spooked investors, as they remain wary of how a scam of this magnitude went undetected for almost seven years. This is the second such case in recent times, as Vijay Mallya fled the country after defaulting on INR 90 billion worth of loans in 2016. 

Economic Scenario

Coming to the economic data points, India’s GDP grew 6.3% year over year in the third quarter of 2017 compared with a three-year low of 5.7% in the previous quarter. The central bank revised its GDP estimates for fiscal 2017-18 as well as 2018-19. RBI expects the Indian economy to grow 6.6% in 2017-18 and 7.2% in 2018-19, in terms of Gross Value Added – GVA.

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