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What is PNB-Nirav Modi scam and how India’s biggest banking fraud worth Rs 11,400 crore unravelled

How did two bank employees manage to help three business firms swindle such a large amount? Read on to understand what is PNB-Nirav Modi scam and how India’s biggest banking fraud worth Rs 11,400 crore unravelled.

Written by: India TV Business Desk, New Delhi [ Updated: February 15, 2018 14:28 IST ]
Punjab National Bank
Image Source : PTI Punjab National Bank

Punjab National Bank is at the centre of India's biggest banking fraud yet. The second largest public-sector bank on Wednesday revealed that two of its employees orchestrated a scam, which amounted to a total loss of USD 1771.69 million or roughly Rs 11,400 crore. 

How did two bank employees manage to help three business firms swindle such a large amount? 

The bank, in its official statement to Bombay Stock Exchange, said that the two employees bypassed the bank’s core banking system to raise payment notes to overseas branches of other Indian banks. The PNB says on the basis of fraudulent Letters of Understanding (LoUs), Nirav Modi and his associates borrowed Rs 280 crore in bank credit and used the same LoUs to raise further capital from other banks. 

PNB had filed a written complaint against Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi with CBI on January 31. The law enforcement agency booked them in the cheating case that involved transactions of Rs 280 crore on February 5. However, on Wednesday, the bank revealed that the quantum of the scam is at least 1.71 billion US dollars or over 11,400 crore rupees. 

A separate case was filed with CBI on Wednesday and the matter has been taken up by Enforcement Directorate. 

Also read: All you need to know about Nirav Modi, diamond moghul accused of swindling over Rs 11,000 crore

What exactly happened?

The scam unravelled when the officials from three diamond firms - M/s Diamonds R US, M/s Solar Exports, M/s Stellar Diamonds- approached the bank officials for a bank credit to import rough stones from overseas. 

Bank credit is a short-term loan international lenders extend to their clients with a guarantee of payment within 90 to 180 days. This is done on the basis of Letters of Undertaking (LoU) issued by a firm's local bank. The banks issue these letters in lieu of a security in the form of cash or property of equal amount to be deposited at the India branch, which can be seized if the client fails to pay. 

When the above three firms approached PNB in January for bank credit via a LoU, the official concerned sought a 100 percent cash margin since there was no pre-sanctioned limit for these firms.

The diamond firms contested the bank's demand and claimed that they have been availing this facility in the past also. But the branch records did not reveal details of any such facility having been granted to the said firms, PNB said in its complaint to CBI. 

This raised an alarm, forcing the bank to launch an internal investigation in the previous bank credits. Preliminary enquiry revealed that two officials of the bank had in the past fraudulently issued LoU to the said firms without following due process.

These fraudulent LoUs were then transmitted across the SWIFT messaging system, based on which credit was offered to the said firms. In its original complaint, PNB specifies that 5 LoUs were issued in favour of Allahabad Bank at Hong Kong and 3 LoUs were issued in favour of Axis Bank at Hong Kong. These loans amounted to Rs 280 crore, as mentioned in first CBI complaint. 

Also read: Bank suspends 10 officials, jewellery designer Nirav Modi under CBI scanner

PNB, its recent press release, said that the amount far surpasses the original complaint. Further inquiry has revealed that the accused have raised an amount to the tune of USD 1.71 billion or approximately Rs 11,400 on the basis of fraudulent LoUs forged by the two employees. 

This is not the first time that PNB has seen trouble emerging from its dealings with the gems and jewellery sector. The bank was one of the lead lenders in the Winsome Diamonds case, where the company’s promoters defaulted on nearly Rs 5,000 crore in bank loans.

 

What is next for Punjab National Bank

At a time when India's public-sector banks are reeling under mounting non-performing assets, a scam of this proportion is not going to board well for PNB. 

Typically, the bank which has issued the LoU is liable to pay the amount to international lenders but PNB seems to be in no mood to do that. 

In its statement, PNB said that its liabilities in the case were “contingent in nature” and that they would be paid out depending on the genuineness of the underlying transactions.

Executives in other banks told media they were insulated against the fraud, as the payment request was raised by PNB (irrespective of who raised that in the bank), and therefore, the payment would have to be met by the Delhi-based bank.

Also read: Punjab National Bank cautions other banks about modus operandi of Rs 11,400 crore scam

However, PNB in a letter to banks, indicated clearly that it was in no mood to pay back and alleged connivance of employees at the foreign branches of other Indian banks.

In a letter to the chiefs of several banks, a general manager of PNB said the letters of undertakings (LoUs) were opened in favour of branches of Indian banks for import of pearls for a period of one year, for which the Reserve Bank of India (RBI) guidelines stipulate a total time period of 90 days from the date of shipment.

“This stipulation was overlooked by overseas branches of Indian banks that are also required to follow the RBI guidelines. There is clear criminal connivance of group companies of Nirav Modi and Gitanjali Gems with our branch official and also, apparently, with officials of overseas branches of Indian banks,” the letter said. 

“None of the overseas branches of India based banks have shared with us any document/information made available to them by these Indian companies at the time of availing buyers’ credit from them,” it added. 

The banking system is heading towards a protracted legal battle as other banks will start suing PNB over non-payment of dues and refusal to honour commitments. 

As the final liability settlement will take time, PNB will continue to be burdened with the pressure of bad loans. At the end of third quarter, PNB had bad loans amounting to 12.11 percent of total loans. The bank, which reported a profit of Rs 207 crore during the October-December quarter, just received capital infusion of Rs 5473 crore via the government’s recapitalisation bonds.

Also read: After PNB fraud, big jewellers Gitanjali, Ginni, Nakshatra also under scanner

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