NEW DELHI: Four years after regulators forced two shadow lenders into insolvency, a belated fraud disclosure by a state-run bank has reopened questions about oversight failures, lender accountability and the long shadow of India’s non-bank finance crisis.
A Fraud Declared, Years After the Fall
On Friday, Punjab National Bank disclosed to regulators that it had classified ₹2,434 crore in lending to two collapsed non-bank finance companies as fraud—an accounting decision that arrives long after the damage was done.
The bank reported that ₹1,241 crore of the exposure related to Srei Equipment Finance, while ₹1,193 crore was tied to Srei Infrastructure Finance. Both entities were once prominent financiers of infrastructure and heavy equipment projects, until mounting defaults and governance concerns pulled them into a regulatory reckoning.
PNB said it had already made full provisions for the entire amount, insulating its balance sheet from fresh shocks. Yet the timing of the declaration—four years after regulatory intervention—has raised uncomfortable questions about how risks were identified, escalated and ultimately acknowledged.
The Regulator Steps In
The collapse of the Srei group was among the most significant episodes in India’s shadow banking crisis. In October 2021, the Reserve Bank of India superseded the boards of both companies, citing serious governance lapses and persistent defaults.
What followed was a rare move: insolvency proceedings against two large non-bank lenders under the Insolvency and Bankruptcy Code, a framework more commonly used for industrial firms than financial intermediaries. At the time of admission into insolvency, the combined debt of the two companies stood at roughly ₹32,700 crore.
Investigators Circle the Ruins
PNB’s decision to label the accounts as fraud may now draw in investigative agencies. In similar cases, such declarations have served as a trigger for probes by the Central Bureau of Investigation and the Enforcement Directorate, particularly where questions arise over diversion of funds or misrepresentation to lenders.
Officials familiar with past insolvency investigations say agencies often scrutinize whether loans were used for stated purposes, whether related-party transactions were disclosed, and how internal controls failed across multiple layers of oversight. While no agency has yet announced a formal probe, the classification itself opens the door.
Resolution, but Not Closure
The insolvency process ultimately transferred control of the two Srei entities to the National Asset Reconstruction Company, part of the government-backed “bad bank” structure designed to absorb stressed assets from lenders.
