How a jeweller 'designed' Rs 11,300 crore fraud?
By Anisha Nayar Dhawan
Is this going to be the biggest fraud case in India's banking history? For now, it seems so. The fraud, involving state-owned Punjab National Bank (PNB), is estimated to include transactions to the tune of Rs 11,300 crore.
How was it detected?
PNB has admitted that these fradulent transactions have been going on since 2011, but it was only detected by January-end. Firms related to billionaire Nirav Modi approached PNB and presented a set of import documents with a request to allow buyers’ credit for making payment to overseas suppliers. Bank officials said very well, you need to give us 100 per cent cash margin. Nirav Modi's jewellery firm turned around to say why I should pay the margin, when I have used the same credit facility in the past without giving any collateral.
That set the alarm bells ringing. The CBI registered a fraud case against Nirav Modi-related firms and also named two PNB officials for wrongdoing. These junior employees had fraudulently issued Letters of Undertaking (LOUs) without following prescribed procedure and without making any entries in the bank’s systems. Based on these fradulent LoUs, Nirav Modi firms took loans from overseas branches of other Indian lenders like Allahabad Bank and Axis bank to pay its suppliers.
In a letter to the exchanges, PNB revealed that it detected some "fraudulent and unauthorised" transactions worth about $1.8 billion at one of its branches in Mumbai. PNB management adressed the press and said that they are committed to "clean banking" and reported the matter to CBI and enforcement directorate as soon as they came to know about it.
But after PNB's failed attempt at showcasing transparency in the press conference earlier in the day, more questions were left than the answers:
1. How will PNB recover the Rs 11,300 crore involved in this fraud? PNB said they have no concrete offer from Nirav Modi firms to settle this. When will they make provisions for this?
2. Who are the others who could be involved in this fraud. Are only Nirav Modi-related companies involved or could there be other jewellery companies involved?
3. Do they have any guarantees from NIrav Modi firms? To what extent?
4. PNB has asked other banks involved that they should also help shoulder some of the losses, because all said and done their overseas branches finally gave out loans to Nirav Modi's companies. There is no directive from RBI on this so far, but PNB has said if push comes to shove they will bear the entire liability involved in this case.
5. Till the time it is decided who will bear how much liability, will there be a threat to banking stability? If there is mistrust between banks to honour committments, does it threaten the entire banking system?
6. Can we put the blame only on two junior level PNB officials who were involved in the wrongdoings? Why were there no red flags raised in overseas bank branches of Indian banks. Were officials there too hands in gloves?
Also Read: Who is Nirav Modi?
7. There have been cases of wrong-doings and frauds by bank officials previously (Ironically involving PNB and LIC Housing in 2010), and RBI had come out with strict compliance and risk assesment norms. How did this escape the regulators eye for 7 long years and what more can the RBI do?
8. Should you be concerned about your deposits with PNB? The govt says this is a one-off case and it will be resolved, and there is no need to worry.
The forthcoming days will certainly be very interesting for India's banking industry. Also the govt must introspect why it is repeatedly infusing capital into loss-making PSU banks with reckless risk management, where will the buck stop when it comes to accountability? In the end who will hold the tab for blind lending, bad loans and now fraud?