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Punjab National Bank Scam

Nirav Modi, the billionaire jeweller along with his uncle Mehul Chowksi and few others scammed Punjab National Bank of over Rs.11,400 crore has fled the country. This news was doing great rounds and everybody must have heard about a few years back.

What is PNB scam?

PNB is India’s second-largest state-run bank lender. The scam stunned the financial sector of the country after a fraud worth Rs.11,400 crore unearthed at a single branch in Mumbai.

The CBI registered a case against Nirav Modi and others in January 2018. PNB registered a case against Nirav Modi, Neeshal Modi ( brother) and Mehul Chowksi (uncle). The bank initially reported a scam of Rs. 280 crore  but it was later realized to be as huge as Rs.11,400 crore.  This is a lot of money. So how does one get away with a scam of such magnitude? Possibly one of the biggest in India’s banking history?

We at ‘B4Investing’ will try and break it down for you to understand.

Nirav Modi is an importer of diamonds. Importers prefer to take loans in foreign currencies as interest rates on that are lower. What Modi then had to do was approach Punjab National Bank and ask for buyer’s credit. Essentially a loan that is taken from an overseas bank and guaranteed by PNB. In order to do this PNB had to issue a “Letter of Undertaking” (LoU) to an overseas bank.  A LoU basically guarantees an overseas bank that if it lends money for a specified period to a client identified by the home bank ( in this case PNB) then the home bank will assure that the money will be returned to the overseas bank.

Most of these overseas banks are Indian banks with foreign branches. Note that the assurance is directly between the overseas bank and home bank. So, the overseas bank give the loan directly to the home bank and not the client. Here, an account is created by PNB called a ‘Nastro’ account to which the overseas bank lend the loan. PNB has alleged that the money raised against these LoUs may not have actually been used to pay for imports but rather for some other purposes. May be even money laundering.

There are multiple theories on how the LoUs could have been issued and used.

The bank discovered that at least 2 of its employees from the Brady House Branch of PNB repeatedly issued LoUs to Nirav Modi’s companies without following the processes. According to the bank the employees issued LoUs without securing cash reserve or collateral and without recording the transactions in the bank’s core banking software. Modi and his companies allegedly leveraged those LoUs in Hong Kong to secure buyers. Credit from the local branches of Allahbad Bank, Union Bank, Axis Bank, Bank of India and State Bank of India.

These suspect banks officials issued LoUs and informed these branches via the international cash transfer service called SWIFT ( Society for Worldwide Interbank Financial Telecommunication). The service connects all international banks worldwide.

The suspect bank officials knew that PNB had not integrated its SWIFT network with the bank’s core banking network. They chose not to record these transactions in the bank’s own system.

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How did the PNB scam unfold?

The scam unfolded when the officials from three diamond firms approached PNB for bank credit to import rough stones from overseas. When these firms requested for bank credit via LoU the concerned bank officers sought a 100% cash margin since there was not pre sanctioned limit to these firms. The firms contested the bank’s demand claimed that they have been giving this facility in the past. However, the bank records did not show any details of such facility been granted. This raised the alarm, and an internal investigation took place. The investigation revealed the two officials had fraudulently issued LoU without following the rules. The SWIFT system was investigated and all the misdeeds came out in broad day light.


LoUs are generally issued when the home bank has an approved line of credit for the client. As part of its due diligence,  PNB should have verified Nirav Modi’s credit worthiness. The other way to establish liability, would have been to ask Modi to present collateral equal to or greater than the loan amount requested. PNB did neither. Generally, Core banking system and SWIFT transactions are both recorded on one interface.

PNB didn’t have this mechanism.  When this technology has not been implemented  the bank usually ensures that the CBS and SWIFT records are in sync and manually records them. But PNB didn’t do that either. The bank claims that rogue employees helped Nirav Modi but this is hard to believe. SWIFT accounts go through a three-tier verification system to Create, Check and authorize the transaction. So, bank employees at different levels are complicit in the fraud or in a rare case completely negligent.

So PNB cannot just be the victim of the fraud as it claims to be. Lets see, who else is responsible for this scam. PNB’s auditors for negligence, overseas bank for overlooking nastro account, RBI for negligence and not enforcing strict lending norms.

How will PNB repay? PNB will recover some of the amount from accused assets. The rest will be repaid by the bank using its own money, which will erode its capital base. The government might infuse some money to help the bank, essentially using taxpayer money.

Some PNB employees are arrested. Cases are filed against Nirav Modi, Mehul Chowksi and others who are under arrest in other nations and government is trying to get them back.

Be Educated!

Be Careful!!

But, Be Bold!!!

Happy Investing!!!

Post Author: Ragini

Holds degree of Masters in Management(Marketing). She likes to travel and explore, read and learn. Her work is her passion which keeps her Mind and Soul Happy

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