Punjab National Bank(PNB) detected alleged fraud (PNB Scam) of Rs 11,500 crore at its Mumbai branch on 14th February, 2018. The alleged fraudulent transactions were reported to benefit a few account holders in apparent connivance of the some of the bank employees. Letter of Undertakings(LOUs) were fraudulently issued by two of the bank employees- Deputy Manager Gokulnath Shetty and Clerk Manoj Kharat – from its Brady House branch in Mumbai without following the processes. Instructions by SWIFT was transmitted to the overseas branches of the other Indian banks to raise buyers’ credit for companies of diamond jeweller Nirav Modi without making an entry in the account books, PNB informed Bombay Stock Exchange(BSE). The alleged fraud amount Rs11,500 crore is more than double of Rs 5,473 crore, the amount promised by the government under bank recapitalization plan last year.
Letter of Undertaking is a bank guarantee and is issued for overseas import payments. A bank, while issuing LoUs for a client (here Nirav Modi), agrees to repay the principal and interest on the client’s loan unconditionally. When an LoU is issued it involves an issuing bank, a receiving bank, an importer and a beneficiary entity overseas. PNB officials allegedly used their access to SWIFT messaging system (used for overseas transaction) and verified guarantees given on LoUs without taking necessary sanctions. As a result, overseas branches of many Indian banks gave forex credit. When an LoU is issued, the message of credit transfer is conveyed to overseas banks through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. This is a significant information as it gives the bank’s consent and guarantee. To issue SWIFT, an official has to log in and fill up confidential information such as the account number and SWIFT code. It generally has three layers of security – a maker, a checker and a verifier within the core banking system before it is issued. In January, when a couple of LoUs matured but the banks did not receive their payments, they approached PNB for repayment of the loans. Also, one fraudulent LoU was issued on January 16, 2018, for and on behalf of Modi’s firms. An internal inquiry by PNB found that fake LoUs were issued, opening the can of worms.
Billionaire Jeweller Nirav Modi, who grew up in Antwerp, the world’s diamond capital, has his eponymous jewellery store on Madison Avenue in New York. The jewellery designer also boasts Bollywood star Priyanka Chopra as his brand ambassador. According to Forbes, Wharton-dropout Nirav Modi has a net worth of $1.73 billion. He is said to have learned the tricks of the trade from his maternal uncle Mehul Choksi who is also the CMD popular jewellery brand Gitanjali Gems. Nirav Modi allegedly acquired fraudulent letters of undertaking from one of its branches for overseas credit from other Indian lenders. None of the transactions were routed through the CBS system, thus avoiding early detection of fraudulent activity. LOUs were opened in favour of overseas branches of Indian banks for import of pearls for a period of one year, for which as per RBI guidelines, the total time period allowed is 90 days from the date of shipment. PNB, in its original complaint, 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. The scam revealed an issue of 163 LoUs by PNB in favour of Nirav Modi’s firms. When Nirav Modi companies asked for LoUs for raising buyers’ credit after the retirement of the PNB employee involved in the scam, the Punjab National Bank sought 100 per cent cash margins for issuing LoUs. This was contested by the Nirav Modi firms, saying they had availed of the facility from as early as 2010. However, the branch records did not have the details of any such facility having being granted to the firms. This was because these transactions were never recorded in the PNB’s Core Banking Services (CBS) software. A total of 18 bank officials have been suspended till now in connection with the scam.
Three damning facts about the alleged PNB scam running into thousands of crores of rupees point to the pervasive rot in the banking system. Only two employees of a single branch of a bank have orchestrated a swindle that cost the bank ten times its annual profit. The fraud remained undetected for about six years in spite of mandatory checks and balances. The perpetrators of fraud and his family were able to escape weeks before the scam can be investigated. These factors are interconnected and point towards the systematic failure of various agencies at the highest level of financial and administrative hierarchy in India. One wonders as to how banks in India could be cheated and deceived for years when every transaction has to be accounted for daily at the end of business hours. Moreover, RBI is supposed to ensure auditing of every bank book and ledger. It was a difficult task when there was manual banking but in the era of computerization and centralized servers this lapse is almost unfathomable.
The gems and jewellery sector could be severely impacted in the coming months following the multi-crore Punjab National Bank scam. There will definitely be some ripple effects and it (the PNB scam) will have a significant psychological impact on the minds of loan givers. Banks will be more cautious from now on when it comes to issuing loans and will rigorously check whether there is any possibility of fraud. This will slow down the lending process (to the jewellery industry).