Every day in the newspapers, we keep hearing about the Punjab National Bank (PNB) scam by Nirav Modi and his uncle Mehul Choksi of Gitanjali group. So, what exactly is this scam and how did they do it?
Nirav Modi and Mehul Choksi are primarily importers of raw diamonds. Their primary business is purchasing raw diamonds, polishing them and sending them back to clients or reselling. 90 % o the world’s polishing and cutting business happens in India.
When they purchase the diamonds from abroad, they have to pay the clients in foreign currency. So, they approach overseas Indian banks for money and produce a Letter of Undertaking (LoU) issued by their Indian bank.
A LoU is like a credit card. Displaying this LoU will get them access to foreign currency. The bank which issued the LoU along with the overseas bank which released the cash will get a small commission on the transaction.
So where did things go wrong?
1. For every LoU issued by PNB to Nirav Modi, the bank should have 100% security or collateral. In the case of Nirav Modi, there was no collateral for any transaction. So, the total value of the scam was around Rs 12,000 crore. In other words, the bank gave away a loan of Rs 12,000 crore without any surety.
2. Money taken abroad by using LoU should be cleared within 90 days. That is the maximum limit. 300 LoUs were issued to the fraudsters. When they had defaulted on the first LoU, the bank should have stopped further LoUs. But they extended 300 and that too, without the 90 day deadline, in fact, without any deadline.
3. Apparently, employees of Nirav Modi were given access to PNB’s software and they bypassed all protocols and got these LoUs issued.
So, if the top management of PNB was not aware of what was happening, they should have taken note of the issue when overseas banks were clearing payments to the LoUs as this would reflect in the computers. Someone should have raised an alarm. Nobody did.
Even the banks which paid cash for LoUs did not conduct due diligence when honoring the LoUs. They could have easily detected and probably did know that rules were being flouted in issuing the LoUs. Why did they stay silent?
4. A letter had been written to the PMO sometime before the scam was unearthed, by a Bangalore-based businessman warning of a possible scam by Gitanjali group. No action was taken.