Punjab National Bank is at the centre of a $1.8 billion fraud - one of the largest to be detected across the Indian banking sector.
PNB said that it has detected some “fraudulent and unauthorised transactions (messages)”, which it has reported to the authorities concerned. Based on these ‘transactions’, other banks appear to have advanced money to customers overseas, said the bank.
The quantum of such transactions is $1.77 billion, the bank disclosed.
The fraudulent transactions are allegedly linked to designer and jeweler Nirav Modi, against whom a complaint has been filed with the CBI.
-> The first such complaint was filed by PNB on Jan. 28, 2018.
-> While the initial complaint speaks of an amount of Rs 280 crore being involved in the alleged fraud, further internal investigations conducted by the bank showed that the amounts involved were much larger and this led the bank to issue a revised statement saying that fraudulent transactions worth $1.77 billion have been detected. Calls made to Nirav Modi’s communication team were not answered. In a statement issued to stock exchanges on Feb. 7, when the matter first came to light, Gitanjali Gems said that promoter Mehul Choksi is taking all legal steps to ensure his name is removed from the list of accused in the FIR filed as he does not have any current dealings with the firms named in the FIR.
Also Read: PNB Fraud: Finance Ministry Asks Banks To Submit Status Report Soon
What and Where it actually happened.
According to details included in the initial complaint filed by PNB with the CBI, the issue was detected at the bank’s mid corporate branch at Brady House, Mumbai in mid-January.
Three firms -
M/s Diamonds R US,
M/s Solar Exports,
M/s Stellar Diamonds - approached the bank for ‘buyers credit’ to make payments to overseas suppliers. According to the complaint, Nirav Modi, Nishal Modi, Ami Nirav Modi and Mehul Choksi were partners in these firms.
Choksi, in his Feb. 7 statement, said he had no dealing with Solar Exports and Stellar Diamond and had retired from Diamonds R US in 1999.
Buyers credit is short term credit (90-180 days) provided by international banks (or international branches of Indian banks) to an importer. This credit is typically provided based on a ‘letter of comfort’ issued by the importer’s local bank.
When the above three firms approached PNB in January for buyers credit via a ‘letter of comfort’, the official concerned sought a 100 percent cash margin since there was no pre-sanctioned limit for these firms.
At this, the firms contested that they have been availing this facility in the past also. But the branch records did not reveal details of any such facility having been granted to the said firms.
PNB Complaint To CBI
The complaint adds that preliminary investigations have shown that two officials of the bank had in the past fraudulently issued Letters of Undertaking (LoU) to the said firms without following due process.
Also Read: CBI Gets Complaints Against Nirav Modi, Jeweller About Rs 10,000 Crore Fraud
These fraudulent LoUs were then transmitted across the SWIFT messaging system, based on which credit was offered to the said firms. In its original complaint, PNB specifies that 5 LoUs were issued in favor of Allahabad Bank at Hong Kong and 3 LoUs were issued in favor of Axis Bank at Hong Kong.
Shares of PNB fell 9.8 percent in trade on Wednesday following the disclosure made by the lender.
PNB said that its liabilities in the case were “contingent in nature” and that they would be paid out depending on genuineness of the underlying transactions.
Share of Gitanjali gems felt the same reaction.
There is no final clarifications disclosed by CBI. It is very possible that Gitanjali gems is not involved. In case of PNB , the final liability of the bank may take time to establish, the detection of a large scale fraud adds pressure on the bank which has been reeling under a pile of bad loans. As of the December 2017 ended quarter, PNB had bad loans amounting to 12.11 percent of total loans. The bank, which reported a profit of Rs 207 crore during the October-December quarter, just received capital infusion of Rs 5473 crore via the government’s recapitalisation bonds.
[This is not the first time that PNB has seen trouble emerging from its dealings with the gems and jewelry sector. The bank was one of the lead lenders in the Winsome Diamonds case, where the company’s promoters defaulted on nearly Rs 5,000 crore in bank loans.]
Source: Bloomberg, google images