Banks in India are telling the Reserve Bank of India (RBI) that they are very concerned about the prospects for maturing letters of credit (L/Cs) issued by the failed Punjab & Maharashtra Co-operative Bank (PMCB).

In late September the central bank ordered PMCB to do no business for six months and capped depositor withdrawals due to violations of banking regulations.

Banking violations

Reports suggest that the violations that led to the RBI's order stemmed from bank officials channelling the equivalent of US$977 million or 70 per cent of PMCB's entire loan portfolio to just one client.

The client was Housing Development and Infrastructure Ltd (HDIL), owned by the Wadhawan family.

Active L/C issuer

PMCB was very active in L/C issuance, counting amongst its regular long-term clients a Mumbai-headquartered steel company.

Reports suggest that US$26.5 million of L/Cs issued by the co-operative bank and discounted by other banks will shortly fall due.

Media reports

"Some of the banks, including a few co-operative banks, have drawn the RBI's attention to the L/Cs that are coming up for payment."

"Since PMCB is unable to pay, these banks will take a hit. For many co-operative banks, even small defaults can be unsettling," local media is reporting.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.