Fraud of 11,300/- Crores which happened at Punjab National Bank (PNB) has shattered the banking industry of India. PNB is the second largest state owned bank of the country and has a very strong presence in north India. Alleged fraud of Rs. 11,300/- Crores is the largest till date in the Banking Industry of India and thats the reason why it is in limelight in Social and Print media.
So what exactly happened in PNB?
Hero of our story (or may be the villan for the time being) is Mr Nirav Modi. Print Media has abbreviated his name as NiMo. NiMo is in the business of trading and cutting polishing of diamonds. Like any other businessman he also needs bank loans for his business. He approached PNB for the loan. Till the day before fraud was exposed, NiMo was very resourceful, wealthy and had good track record with banks in India. When he asked for loan, PNB agreed and said we can lend you at say 11%.
Nimo then enquired with Foreign banks. Foreign Banks are lending at say 4%. (How thats possible and why Interest rates in India are high and foreign rates are lower, can be a subject of seperate blogs. For time being lets accept we can get loan from foreign banks at much much cheaper rates). Like every rational person, NiMo thought if I can get funds at 4% in abroad why should I take loan from Indian Banks? Here comes the twist in the story. NiMo is very rich, resourceful person but foreign banks dont know this. NiMo has no track record with Foreign Banks. Also, while getting loan, we need to offer some security. Most of the NiMo properties are in India. Foreign banks wont accept these properties. So how can NiMo get loan from Foreign Banks?
Here comes the modus operandi of the entire fraud. NiMo went to PNB and said, “look, you know me. You know that if I borrow, I will pay you on time. Why dont you tell this simple fact to foreign banks? I will pay you commission for this”. PNB agreed. PNB told foreign banks that NiMo is a good fellow. If you give him loan, he will pay you back on time. And if he fails to pay, then dont worry, we will pay you back. This assurance which PNB gave is called as Letter of Undertaking (LoU) or Letter of Comfort (LoC) in banking terminology. This LoU’s are issued through SWIFT software. It is a well established practice in the banking Industry.
NiMo got huge huge money through these LoU’s from foreign banks. These LoU’s were infact guarantee given by PNB. So for foreign banks there was no risk. They were sure in case NiMo fails to pay back, PNB has assured them to pay.
Unfortunately, the worst case scenario came to realty. NiMo failed to pay. Foreign banks took the LoU’s and came running to PNB for the repayment. And here came the shocker! PNB said we have never issued these LoU’s!! All the LoU’s you have brought to us are forged and fraudulent!!! We cant pay you on basis of this!!!!
Why PNB cant pay? PNB said some of our employees have misused the SWIFT software to issue this fraudulent LoU’s. This LoU’s are not sanctioned by us. Someone has misued the SWIFT software and have issued these fake LoU’s in name of PNB. How can we pay you for this?
Amount of these LoU’s were Rs. 11,400 Crores. Indian Banking Industry has shattered due to this. PNB as well as banks wjo have lend NiMo are absolutely clueless as to what stand they should take in this case. There is a twin loss to the banks due to this. Banks who have lend to NiMo, need to classify their loans as NPA. And PNB might have to pay for this, if authorities orders accordingly.
This blog was just to discuss the modus Operandi of the fraud. What can be the consequences of this and how it could have been prevented, will try to see in next blogs.
Till then, stay tuned and Happy Reading 😊
CA Ashish Blog 