PNB Fraud: Nirav Modi, Mehul Choksi shake up the Indian banking system

The unearthing of PNB’s Rs. 11,400 crore fraud case has bewildered investors with its combination of fake documents, siphoning of public money and the decamping of the fraudsters well ahead of the public disclosure by the bank. 

What is more sorry is the way PNB is seen playing victim while narrating the ordeal, which is further inflicting wounds to the already bleeding Indian banking system.  The bank informed the exchanges about the fraud in a filing on Tuesday.  

Punjab National Bank (PNB) is no small bank; it is the second largest public sector bank in India.  How a fraud of such a large scale went undetected for seven years is a question that disturbs every bank account holder.

Banks in India conduct regular internal and external audits and are under the supervision of Reserve Bank of India, despite all these, the culprits have not only managed to siphon money but also managed to cover it up for so long?  

How did Nirav Modi and others manage to suck out so much money from the banking system without any collateral?  

The frauds were committed through LoUs and buyers' credit transactions.  According to news reports, the Brady House branch of PNB had not integrated its SWIFT system to its core banking system (CBS). SWIFT system is used to send instant messages to foreign banks or foreign branches of Indian Bank to get LoU.  The officials handling the SWIFT system conspired with Modi to issue Letters of Understanding (LOUs) for amounts that were beyond the sanctioned limits for his companies. LoUs guarantee that a bank is obliged to repay the loan if the actual borrower defaults.  The original LoUs were issued in 2011 for Rs. 800 crore which were subsequently rolled over to avoid detection.  

After the shoddy dealings of Nirav Modi surfaced, skeletons of other such fraudulent transaction are tumbling out to the closet.  Mehul Choski is being portrayed as the kingpin of all these frauds and the attention of investigators is now passing on to companies like Gitanjali Gems, Diamond R Us, Solar Exports, Stellar Diamonds and 150 shell companies.

The Enforcement Directorate has raided several offices and stores belonging to the jewellers. A total recovery of Rs. 5,649 crore in form of valuables, diamond and gold has been reported.

Also, in a face-saving act, the Ministry of External Affairs suspended the validity of the passports of Nirav Modi and Mehul Choksi for four weeks and CBI with the help of Interpol has issued lookout notices. 

Among banks, Allahabad Bank has lent most to Nirav Modi and Mehul Choksi’s companies (Rs. 4,000 crore), other lenders include Union Bank, State Bank of India who has an exposure of around Rs. 1,000 crore.  

If the RBI, ED and the banks do not make significant recoveries and the CBI and Finance ministry fail to bring Nirav Modi and Mehul Choksi to justices, this episode will further erode the confidence of depositors, investors and other stakeholders in the Indian banking system.