Bhartendu Vimal Joshi, Entrepreneur | Dreamer | FinTech Enthusiast | Web Developer
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The Punjab National Bank (PNB) Fraud, the biggest ever detected by an Indian Bank. Explained.
This week, the India’s second largest PSU bank announced the discovery of the biggest ever fraud detected by any Indian Bank. The news came out that three companies - Solar Exports, Stellar Diamonds and Diamond R US belonging to billionaire jeweller Nirav Modi and Mehul Choksi, Managing Director of Gitanjali Gems Ltd., and two other people, had defrauded the bank through a single branch in Mumbai over a period of seven years, resulting in total loss of ₹11,400 crore ($1.74 billion) to the bank.
Let us see all major events happened in this fraud.
- On January 16, 2018 the accused firms presented a set of import documents to the Mumbai branch and requested buyers’ credit to pay overseas suppliers. Since they had no pre-arranged credit limit, the branch official asked the companies to put down the full amount as collateral so the bank could issue “letters of undertaking” (LoUs) to authorize the credit.
The firms argued that they used to have such facilities in past without keeping any collateral to the bank.
- After the investigation, bank found that two junior employees, colluded with the accused, used to get LoUs from bank without having a sanctioned credit limit or maintaining funds “on margin”.
- Since the two systems - namely the SWIFT system, which is used for international transactions, and the core banking system (CBS) work independent of each other in PNB and many other banks. The employees entered the transactions on the SWIFT interbank messaging system without entering the transactions on the bank’s own system, due to which the whole process kept on going for almost seven years until one of the employees retired.
- It was found that the fraudulent LoUs were used to obtain short-term credit from overseas branches of other Indian banks except one case, where an overseas bank may also have been deceived by the accused.
- On 29 January, a PNB official from Mumbai filed a criminal complaint with India’s federal investigative agency against three companies and four people, including billionaire jeweller Nirav Modi and Mehul Choksi, the managing director of Gitanjali Gems Ltd, saying they had defrauded the bank and caused a loss of Rs280 crore ($43.8 million).
- Based on PNB’s complaint, the Central Bureau of Investigation (CBI) registered a preliminary case against the companies and the people named on 31 January.
- Later, on this Wednesday, PNB said in a regulatory filing it had discovered fraudulent and unauthorised transactions totalling ₹11,400 crore at the Mumbai branch. Investigators have said the latest disclosure was related to the earlier case filed.
- On 15 February, the ED and CBI came into action and started conducting searches at PNB branches and also at Nirav Modi’s home and offices.
- On 15 February, the finance ministry has issued an advisory to all banks to review their large customer exposures.
Some other points to be noted.
- It is being said that Nirav Modi, the main accused of this case, left India on 1st January, 2018.
- The Market Capitalisation of PNB is ₹31,132 crores and this fraud viz. of ₹11,400 crores will be responsible for losses of more than one third of the total market capitalisation of the bank.
- The Net NPA of the bank are already worth ₹32,702 crores, and this fraud worsens the situation of the bank.
- It is also being said that Gitanjali Gems, Gili India and Nakshatra — companies promoted by another jeweller, Mehul Choksi, who is Modi’s uncle, are also involved in this fraud.
- Several other banks who have extended loans based on the PNB LoUs that were later found to be fraudulent are at risk of losing money.
- On Thursday, 15 February, share price of Gitanjali Gems and PNB fell 20% and 12.89% respectively because of the news.
Surely this is the biggest fraud ever detected by any Indian Bank.