We know that Nirav Modi, the billionaire jeweler who along with others scammed Punjab National Bank (PNB) of over 11400 crores and later fled the country. The Bank initially reported a scam of rupees 280 crores. But it was later realized to be rupees 11400 crores. This is one of the biggest in India’s banking history. Punjab National Bank registered a case against Nirav Modi, His Brother Neeshal Modi & His Uncle Mehul Choksi on February 13, 2018. The CBI has registered a case against Nirav Modi on January 29, 2018. In March 2019, Nirav Modi was arrested in London.
Nirav Modi is an importer of diamonds. Basically, importers prefer to take loans in foreign currencies as interest rates on that are lower. In this case a loan that is taken from any overseas bank guaranteed by PNB. Then what Modi had to do was approach PNB & ask for buyer’s credit. In order to do this PNB had to issue a “Letter of Undertaking” to an overseas bank. LoU guarantees an overseas bank that if it gives money for a specified period to identified client by the home bank (in this case PNB) then the home bank will assure that the money will be returned to the overseas bank.
LoUs are generally given when the home bank has an approved line of credit for the client. PNB should have verified Nirav Modi’s credit worthiness The LoUs are delivered to Society for Worldwide Interbank Financial Telecommunication (SWIFT) which is coded messages that are used in international banking. In India, all the banking records are saved on the Core Banking System (CBS). But surprisingly PNB didn’t use these mechanisms.
Till December 2017, everything seems very smooth and fine as the partner in crime Mr. Gokulnath Shetty, has retired from his office of deputy manager of PNB, Brady Road branch. The scam exposed in January 2018, when the officer received a call from the representative of Nirav Modi to renew the LoU and the new officer found no equivalent worth of collateral is extended from the client asking for LoU. Digging deep into the matter, this banking malpractice was conducted by Mr. Shetty, Since 2011. Mr. Shetty, the then Deputy Manager at Brady House branch of the PNB, had continued in the same seat for seven years and issued fraudulent LoUs with impunity. Mr. Shetty misused his position that empowered him clearance of MoUs as he is proficient in Finacle, an ERP software program, internally used by PNB to verify large transaction. He bypassed PNB’s core banking system Finacle and issued LoUs fraudulently.
CBI investigations revealed that messages for fraudulent LoUs were sent to overseas banks by misusing international messaging system for banking called SWIFT platform and without making their subsequent entries in Finacle that is instrumental for core banking system and thus Mr. Shetty was bypassing any scrutiny of such funds in the bank.
In this fraud of Rs. 11400 Crore, that goes to the hands of Nirav Modi and Mehul Choksi, CBI found nearly Rs.5 Crore of disproportionate assets of Mr. Gokulnath Shetty which amounts to 0.25% of the fraud amount. With this unethical practice the retired banker is now in jail.
Is there any gain to anyone in this scam?
In 2016, the PMO office received an application against the Gitanjali Jewellers and its Promoter Mr. Mehul Choksi that alarmed a possible mega fraud similar to Vijay Mallya but the PMO decided to keep silence on the ongoing fraud.
The scam is a clear example of Operational inefficiency of the bank from multiple points.
I understand the readers of this small report must understand the benefits of doing business ethically and the cost of fraudulent practice in long run. Operational inefficiency leads to operational risk and finally the financial and business risk to any organization.
Dr. Tushar Panigrahi, Unitedworld School of Business (UWSB)
Disclaimer: The opinions / views expressed in this article are solely of the author in his / her individual capacity. They do not purport to reflect the opinions and/or views of the College and/or University or its members.