PNB Fraud, Nirav Modi Row

There are myriad of news in the print media as well as in digital media about the PNB Fraud and Nirav Modi. You are also searching such kind of stuff to know “What happened in reality?” What will be consequences and Repercussion of this event? What will be implications government and the bank is going to take? How bad will it affect the economy of the company? Due to the seriousness of the issue and the modus operandi of the scam, we decided to talk about it in detail. Therefore we are going to make two or more article like a series on the PNB fraud and talk about the questions that might also disturb you.

Main News in brief.

The Punjab National Bank informed the Bombay Stock Exchange about some fraudulent transaction. They inform them that the fraudulent transaction is detected from one of its branches in Mumbai. The estimation of the fraud is around 11,400 crores in Indian Rupee. This transaction involves PNB officials handing out Letter of Understanding to companies associated with the luxury diamond jewelry designer Nirav Modi who was ranked 85 in the Forbes list of India’s billionaires in 2017.

First of all, this is not the first case that India witnessed on the same line. PNB fraud is the second largest in India. It was the UCO Bank that in past advanced $3.2 billion in export advances to Iran against overseas sales that were never made in reality. This fact is not about to underestimate the seriousness of the present case. It is to show that we are not learning from our mistakes. Even though the modus operandi used by the Nirav Modi firms is different than earlier but still we have to be more cautious about our banking transactions. The present fraud shows fault in our regulatory system and put a great question mark on the internal and external auditors. How they miss such a great amount calculation in their audit report.

Overview and the Background of Fraud

The case came into the light to the officials first when the Nirav Modi firm executives went to the PNB branch at Brady House in Mumbai. For years, the Nirav Modi firm executives had applied for the Letter of Undertaking also known as LoU to get money internationally for their business. The person who used to issue the LoU is retired now and the new banking official in-charge of the LoU issuance demanded the mandatory collateral against the LoU. But the executives of the Nirav Modi firm refused and told them, Why they are asking for collateral? In the past, they never submit any collateral and always get the LoU without it.

Later on, it was found that a bank official for some years was giving LoU to the Nirav Modi firm without getting proper approval and without making any entry in the Core Banking System (CBS). The official who issues LoU, he did not enter this transaction into the CBS system. He used the SWIFT system for it. Using the SWIFT system, the bank official sends the message to banks in foreign that LoU in the name of Nirav Modi firm is issued by them and they can give the loan to it. This way the Nirav Modi firm generate massive loans in foreign soil using PNB LoU.

Explanation of important terms

Now, the terms must be confusing you, especially to the people who do not have economics as a subject.

Letter of Undertaking: it is also known as LoU. It is issued by the Banks to the companies as a bank guarantee against which another ledger giver a foreign currency loan.

When an importer goes to any bank for a guarantee or issuance of LoU, generally they had to submit a collateral. They have two choices:

  1. The bank asks him for collateral, which could be land or a fixed deposit.
  2. The bank sanctions a credit limit after a credit appraisal.

In this case, neither of the two procedure was followed by the bank officials.

Core Banking System: in short CBS, it is the software used to support banks most common transactions and also works as a record keeper. It helps the bank to centralize its records and it can be accessed from any place or location.

The way official fraud their own bank and work in an unethical manner is by using the SWIFT. The SWIFT system is not linked to CBS and checks failed at several levels allow scam to grow at such a big level.

SWIFT: Society for Worldwide Interbank Financial Telecommunication. It is an internationally recognized identification code for banks around the world. It was started in 1973 and till that it grows into a SWIFT code in the banking sector. The SWIFT codes are similar to IFSC Code that are used at domestic level. SWIFT codes usually used for international wire transfers. In simple and laymen language, SWIFT is a messaging network used by the financial institution to securely transmit instruction.

Now, you have understood the major economic term and the system used in this fraud. In the next article, we will deal with the impact of PNB fraud in our economy and another sector. Also, we will provide the answer to above-stated questions at the beginning of this article.

If you have anything to share withus about the issue or you have any doubt regarding it, please share it with us in our comment section.

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