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Gem Of A Scandal

Gem Of A Scandal

When some rich people were busy exchanging diamond jewellery and gems on the occasion of Valentine’s Day, a multibillionaire diamond merchant took the entire banking sector by storm, resulting in what could be termed as the biggest scam in the banking sector.

Until a few days back, very few knew Nirav Modi as a person, as the brand Nirav Modi is more popular amongst the elite and celebrities from both Bollywood and Hollywood. The brand became more popular when his jewellery was used by the celebrities during Oscar award ceremonies. Till the time of writing, the named rocked the micro blogging site – twitter – with thousands and thousands of tweets – some accusing the Modi government and some relegating the things back to the UPA-led Congress government.

While our leaders and elected representatives take a dig at one another, two junior employees of India’s second largest bank – Punjab National Bank (PNB) –– cheated the entire banking fraternity by doing fraudulent transactions worth Rs. 11,400 crores for Nirav Modi and his relatives.

The figure happens to be 49 times the net profit of PNB for the quarter ended 31st December, 2017. If one correlates it with the budget this year, it comes to 13 per cent of the education budget or 20 per cent of the health budget of the entire country! This is the irony of this country, where the deserving do not get any benefit and the privileged feel no accountability towards its growth.

The Press note released by Sunil Mehta, managing director of the bank, says that the scam had started way back in 2011 and was detected in January 2018. And FIR was filed with the CBI on January 31. And where is the culprit? As is the case with Lalit Modi and Vijay Mallya, he has already fled the country. What an efficient system! And how did this happen?

Two of the bank employees used SWIFT messages – a financial messaging service – for transferring money, to help the culprit, knowing full well that these messages do not form part of their core banking system (CBS), which takes a track of all the transactions. Now one may think, if SWIFT was used to transfer money, even if the messages were not recorded, the money would have either arrived in the bank’s account or would have gone out. How the bank’s management did not come to know about these transactions?

It all started with the Modi’s company approaching the bank for opening letter of credit (LC) for importing rough stones. LC is a widely used instrument for getting credit in export-import transactions. It gives the importer a credit period of 90 days, while the bank pays on behalf of the importer in lieu of some charges and interest. In case the client is not in a position to pay within the stipulated period, it is a common practice to extend the LC period and there is no limit to such extensions. This flaw was exploited to his advantage by Nirav Modi.

LC is normally opened based on a letter of undertaking (LoU), which is similar to a bank guarantee. In this case, LoU was issued by these two employees, who had no authority to issue such undertakings. Based on these LoUs, the foreign branches of Indian banks like Axis bank and Allahabad bank transferred money to the bank’s Nostro account – an account that an Indian bank has with an overseas bank – from where the money was transferred to the overseas parties.  In other words, the money did not hit the bank’s account in India. It is a different matter why the bank did not monitor its Nostro account for the last seven years.

And who these overseas parties were? When a businessman thinks of doing such transactions, normally the parties are hand-in-glove with one another. The overseas parties in this case were none other than companies formed by Nirav Modi’s relatives. In fact, three companies, including Mehul Choksi’s (who happens to be Nirav Modi’s uncle and guide) Gitanjali Gems, Gili India and Nakshatra, used the same modus operandi of getting LC opened and the bank employees exploiting SWIFT to transfer money overseas.  

Simply put, the loan profile of PNB kept on increasing as LC were opened and extended, without affecting the balance sheet. It has also been reported that the overseas banks, which were under obligation to give credit for 90 days, flouted the RBI guidelines and gave credit for a year. Also, the bank alleged that the overseas banks did not share the credit documents with them. Another speculation is that these banks might have offloaded its loans to other banks as well. In other words, the actual effect of this scam may be much higher than what is reported.

The bank reportedly came to know about the fraud only on January 16, 2018. Incidentally, the accused firms presented another set of import documents to the Mumbai branch for availing buyer’s credit. This time, the bankers asked them for collateral as the company did not have any approved working capital limit. When the firms argued that they have been availing of this facility in the past, the banks scanned through the past records and found what its employees had been doing for the last so many years. In the normal course of business a company cannot avail of working capital facility from the bank unless it is sanctioned by the competent authorities after execution of proper agreement with adequate security. So Nirav Modi had the advantage of LC opened without any security and without any sanction!

The fact that it took such a long time, seven years to be more precise, to expose this scam, itself shows the efficiency of those who manage these banks? If top management runs the show in banks, then how two employees, who enjoyed the privilege of using the banking system, can flout all rules to serve those multi-billionaires for their own selfish interests?

While international banks have tightened their supervision after the credit crisis of 2008, Indian banks seem to be running behind. The corporate governance norms are met and complied with on paper while business is being run by a few, who dance to the tunes of those in power – either political or big conglomerates having huge financial backing.

And when the situation goes out of control and the bank balance sheets unmanageable, the government comes up with restructuring plans while a few billionaires continue to exploit public money for their own good, disturbing credit culture, taking banks for granted and setting a wrong example for others.

At a time when the banking sector is not in the pink of health and is sitting over a huge pile of bad loans, the PNB scam also shows that multi-level audits that the banks go through, are not sufficient to prevent these frauds. Normally, a bank goes through four kinds of audits and inspection – statutory audit (done by the statutory auditor), concurrent audit (done by a third party), internal audit (done by bank staff) and inspection by RBI.

The fact that none of these checks could find out the scam shows how inefficient our system is. Nor the banks have adequate risk management systems in place. It also points out that whatever be the norms prescribed by the apex bank, it would require a few like-minded people to collaborate and take the whole system for a ride. And by the time someone would come to know, the government would have not much to do except for seizing whatever is left. 

This year too, the government gave Rs. 88,000 crore as part of a larger recapitalisation package of Rs. 2.11 lakh crore. It is unfortunate that while a few privileged exploit the system, the public money is used to recoup the ailing banks, without any assurance that banks will ever stop these malpractices. And PNB alone was given Rs. 12,077 crore over the last eight years. And it took one Nirav Modi to take away Rs. 11,400 crores. Why should public money be used to capitalise such banks when the government cannot manage and run them efficiently?

While Nirav Modi is having a gala time in Belgium, India Inc. will take a few months to recover from the psychological shock. As for the economy, may be finance minister Arun Jaitely’s men will come out with some miracle or another jhumla to solace the aam janata before the 2019 elections.

(The writer is a company secretary and can be reached at

(Published on 19th February 2018, Volume XXX, Issue 08)