Punjab National Bank Fraud

The hot news for the day is one of the biggest ever frauds in Punjab National Bank, to the tune of Rs. 114 billion.  Alarming things to watch:

• Bank has named Jewellers Nirav Modi and Gitanjali Gems’ Mehul Choksi as people involved.
• Mistake by overlooking the Core Banking system, in issuing the unauthorized fraudulent guarantees.
• PNB contends that the other banks did not follow due diligence and thus possibility of employees of these banks also being involved is foreseen.
• The caution letter issued by PNB also involves other banks’ participation in the fraud.

MODUS OPERANDI:

1. All that happened involved two of PNB employees in the scam who overlooked the process of raising payment notes to overseas branches of other Indian Banks, viz Allahabad Bank, Axis Bank, and Union Bank of India, through Swift.
2. In 2011 a Letter of Undertaking (LOU) was opened at the Fountain branch of PNB in Mumbai by the alleged fraudster.
3. A Letter of Undertaking (LOU) is one issued by a bank, where the banks agrees to unconditionally repay the principal and interest on client’s loan.
4. Here a client could be termed as one, who uses funds or credit limit with an Indian Bank to get cheaper foreign currency loans (Otherwise known as BUYER’S CREDIT).
5. LOU has been misused by a Deputy Manager of PNB who used SWIFT messing system (a system used by banks to do overseas transactions to authenticate any transaction), to authenticate guarantees given on LOUs without any sanctions.
6. Based on such authentications, overseas branches of several Indian Banks extended forex credit to the clients.

OTHERS’ INVOLVEMENTS AND ACTION TAKEN

• Many Indian Banks, with overseas branches, are likely to be impacted since they have extended loans based on the LOUs.
• PNB claims that these are fraudulent LOUs, and hence they cannot own any claim on these LOUs.
• In the process PNB has suspended 10 of its employees and also referred the case to CBI and ED.
• Incidentally, the earlier LOUs matured during January and the banks made a claim from PNB, which in turn was denied by the bank, quoting that these LOUs were fraudulent.

RESULTS:

• The fraud that has occurred is estimated to be 8 times that the bank’s profit of Rs. 1,325 crores made in 2016-17.
• The amount of fraud is equal to one third of PNB’s market cap of Rs. 35,300/-.
• PNB prices have crashed in the stock market.

We might recall that Government has plans to induct Rs. 5,473 crores in the PNB equity, as a part of Recapitalization scheme.