PNB fraud: How Nirav Modi defrauded India's second largest bank of Rs 13,000 crore

Ever since the Rs 11,400 crore Punjab National Bank (PNB) fraud case came to light, the state-owned bank is bearing the brunt of investors who continue to remove their money from its stock. 

The fraud was detected during the quarter at its Brady House, Mumbai Branch where through connivance between these entities (in gem and jewellery sector) and few employees of the Bank, some Letters of Undertaking (LOUs) and Foreign Letter of Credit (FLCs) were issued fraudulently and in unauthorised manner to certain overseas branches of Indian banks through the misuse of SWIFT system of the Bank which was then not integrated with CBS, the bank said.

The fraud was first disclosed by PNB in February to be worth Rs 11,400 crore but was later raised to Rs 12,700 crore as new facts came to light.

The quarterly loss of Rs 13,416 crore was attributed mainly to higher provisioning particularly to account for bad assets rising more than three-fold from Rs 4,910.39 crore to Rs 16,202.82 crore.

The bank also saw its gross non performing asset level deteriorating to Rs 86,620.05 crore from Rs 55,370.45 crore, rising, as a percentage of assets to 18.38% at March end from 12.53% year ago while Net NPAs soared to 11.24% against 7.81%.

"Without qualifying our opinion, we draw attention to Note No.11 regarding provision at 50% amounting to Rs. 7,178.42 crores as against the total amount of Rs 14,356.84 crore in respect of fraud involving certain accounts under Gems & Jewellery sector as per the dispensation given by the Reserve Bank of India," the auditors said.

To add to the woes, there has been a wide divergence between the net profit arrived at by the bank for FY17 and that assessed by the banking regulator.

However, in February 2019, PNB had reported net profit of Rs 230.11 crore for the corresponding quarter a year ago.

In January 2018, a fraudulent credit against the bank, an FMR-1 (fraud report format of RBI) was submitted to RBI January 29, 2018 amounting to $44.22 million equivalent to Rs 280.70 crore (related to 3 group firms of Nirav Modi).
 
A criminal complaint for registration of FIR against accused persons, including the maker & checker employees of the bank, for offence of cheating of fraud was filed with Joint Director (Policy), Central Bureau of Investigation and same stands registered on January 31, 2018.

In February 2018, Nirav Modi,the kingpin behind the largest banking scam in the country's history, has virtually wrung his arms in the air saying PNB's overzealousness has shut the doors on his ability to clear the dues, which he claimed is much lower than the bank has gone public with, reported in PTI. 

How did Nirav Modi defaruded PNB? 

A partnership firm of Nirav Modi Group approached PNB’s branch at Brady House, Mumbai. They presented a set of documents with a request to allow buyers credit for making payment to the overseas suppliers.
 
Since there was no sanctioned limit in the name of the above firms, the branch officials requested the firms to furnish at least 10% cash margin for issuing Letter of Undertaking (LoU) for raising buyer’s credit.
 
On denial, the firms contested that they have been availing such transactions for past several years.
 
On scrutiny, it was observed that earlier issuance of Letter of Undertakings (LOU) had been made by the branch officials through SWIFT (The Society for Worldwide Interbank Financial Telecommunication) without obtaining approval of the competent authority, necessary applications from Importer, documents of import, legal documentation with bank and also without making entries in Bank's trade finance module of CBS system.
 
Since then, a series of meetings were held with representatives of Nirav Modi group and Gitanjali group at Delhi & Mumbai to impress upon them to pay the amount. They were also directed to provide all necessary documents as per law to ensure that the imports are bonafide trade transactions.