Punjab National Bank is a 123 years old state-owned multinational bank, having 80 million customers, served by 70,000 employees.
Yesterday, the entire banking sector of India was stunned, when PNB announced that they have been hit by a banking fraud to the tune of Rs 11,400 crore.
Although banks have been facing issues of fraud since long, the magnitude of this fraud was the most shocking: Rs 11,400 crore, the value of money being syphoned-off from PNB is 8-times of their annual revenues in 2016-17, which was Rs 1,324 crore!
In their regulatory filing with the BSE, the bank said that the transactions were “for the benefit of a few select account holders with their apparent connivance” and that “based on these transactions other banks appear to have advanced money to these customers abroad.”
How exactly did it happen? Who are the culprits?
The Modus Operandi Of The PNB Fraud
The fraud has all the elements of a thriller movie: Corrupt bank officials, greedy officials from a diamond merchant, and technical glitches which were fully exploited.
Nirav Modi is a global diamond jewellery house, founded by Nirav Modi in 2010.
Officials from this jewellery house approached PNB for issuing letters of credit for importing rough stones from abroad.
Now, letters of credit are a common banking practice, which is used to obtain funds from branches of other banks. In this case, these letters of credit were used to transfer Rs 11,400 crore from Axis Bank and Allahabad Bank’s branches from various countries.
The letter of credit is a form of trust documents, and the loan is later recovered from the bank which issued these letters.
Now, the fraud happened because of a technical glitch in PNB’s Finnacle banking software.
The time when Letter of Undertaking was issued originally, officials from Nirav Modi convinced few corrupt PNB bankers to issue fraud letters.
When the LoU was actually given to the overseas banks to transferring funds, the corrupt bankers from PNB increased the amount in the SWIFT code, which are global financial messages used to transfer billions of dollars across boundaries.
Now, the SWIFT code takes time to get updated in the Finnacle software, and this was the glitch which was used by the conmen.
It was obvious that the fraud was undertaken to avoid immediate detection, and all the conmen needed was time, to get out of India with their treasure.
This Is Not The First Time!
Exactly 5 years ago, Winsome group, a well-known diamond merchant used the same modus operandi to syphon-off billions from Indians banks. In that case as well SBLCs, which are standby credit letters, were used fraudulently. A banking consortium led by Standard Chartered Bank extended Rs 6800 worth gold to the Winsome Group, and PNB had lost Rs 1600 crore in that fraud.
The case is still being investigated by the CBI, just like Nirav Modi case, which has been handed over to the CBI by Finance Ministry.
The Mehtas, owners of Winsome Group, never came back to India, as they are now safely settled in Singapore and Dubai after taking citizenship of Saint Kitts
Nirav Modi too was in China until a few days back, and rumours are going around that his family may settle in UK soon.
PNB has said that banking rules were broken by the banks which transferred the actual funds: Axis Bank and Allahabad Bank, and now, a prolonged legal tussle would be held.
We will keep you updated.