Page 37 - English Tehelka Issue 5 - March 15, 2018

PNB fraud

Decoding the PNB fraud: This payment is to someone outside That is what is supposed to happen. the core banking solutions (CBS) for

The orders never showed up in
But in reality, it seems that things
India usually, to fund a purchase of
Time to fix the rot in the diamonds or other goods. went a little berserk. monitoring. The LoUs were rolled
over all the way and increased over
Note this carefully: The other
time too. The rogue official retired in
The Reality: A Bit of a Ponzi
bank gives money to the PNB’s Nos-
2017, and the replacement refused
NM might not pay back at all. NM
tro account. Not to NM. They don’t
banking system care about NM. They only know might use the money to speculate in to roll over the LoU, which came
the markets, or do something else.
that the PNB has given a guaran-
due in January 2018 because he
What if NM simply doesn’t have the couldn’t find the past transactions
tee on the SWIFT channel. Signifi-
cantly, the other bank is nowadays
money to pay back? Instead, he asks in the system. No rollover means a
mostly the foreign branch of Indian some PNB official to open another default, since there was no money
banks. The foreign banks always LoU for the amount owed plus in- to pay. So the PNB quickly filed an
What really happened in the PNB scam? Here is the genesis, the crux and modus operandi smell something sinister in such terest. So if the first LoU is at USD FIR saying the bank has lost 280
of the scam for the understanding of common citizens, as explained by kiran suri, a former Senior deals. Resultantly, the foreign banks crore on the January 2018 LoUs. Fur-
ther investigation by the PNB found
couldn’t care less about whether
Manager at the Punjab National Bank (PNB) NM was buying diamonds or bitcoin Ironically, the that the fraud was massive — to the
– to them, the PNB would pay back bank gave tune of Rs 11,400 crores.
even if NM’s wallet gets stolen. Naturally, when the fraud un-
Now the question is why should guarantee for folded, everyone in the bank pan-
et us begin from the be- worth at least Rs 110 crore as collat- tively — that says the PNB will pay if the PNB give a guarantee? Obvi- Nirav Modi icked. Could Nirav Modi pay it back?
ginning. To understand eral. But the PNB, for some strange NM doesn’t pay. ously for a fee because for each If it was intended to be paid back,
how things work, we have reason, doesn’t ask for collateral. As the foreign bank trusts the and every transaction, a bank may without collateral the rollovers wouldn’t have been
to begin from the concept. Now the foreign bank is ready to PNB, it gives the money to the PNBs charge up to 2 per cent to issue the required. At some point, things got
L Some importer, let’s call lend NM the money because the account with it, called by the PNB LoU. Now we come to the other part. even after the so out of hand that rollovers were
him Nirav Modi or NM, wants to im- PNB will guarantee it and the for- as a “Nostro” — the account that What happens when it’s time to pay experience with required in order to stay stable.
port pearls or diamonds and then eign bank trusts the PNB. Why does PNB maintains with banks abroad, back? NM has to get the pearls and Generally, this would not be a prob-
sell these. The purchase requires it trust the PNB? Because PNB sends where the other bank will send diamonds in India, sell them, re- Vijay Mallya lem. If the PNB had done things
money, so NM approaches a bank, a message on SWIFT — the banking money meant for the PNB custom- ceive the money and pay back to the where loans to right, they would have had collat-
say Punjab National Bank (PNB). On message service — that PNB guar- ers. The PNB’s nostro account gets PNB on the due date as per the LoU. eral worth the amount of guaran-
its part the PNB says look, I’ll give antees Rs 100 crore of money for the money. The PNB then gives On its part, the PNB will pay back Kingfisher were tee, and they would have sold that
you a loan but it will be at an inter- 180 days for NM at an interest rate NM the money from the Nostro the foreign bank saying okay we got given on nearly no collateral and paid the foreign bank.
est rate of, say, 10 per cent. of, say, LIBOR + 2 per cent. It’s like a account, usually paid off to whoever the customer’s money so we’re giv-
NM thinks hard and says, no, message — written in stone, effec- NM is buying his diamonds from. ing it back to you with interest, etc. collateral The real issue
that’s too much. Wait, why don’t In this case, the PNB didn’t have any
I take a foreign currency loan in- collateral. The question is why did
Much lower interest rates, no? I can PNB ups fraud 10 million, the second one is USD 11 the PNB give a guarantee without
stead, after all I’m buying in dollars?
collateral? If a commoner goes for
million to cover the interest on the
get at LIBOR + 2 per cent and LIBOR amount by 1322 first. The money from the second a loan to a bank, they’ll ask us for
(London Inter-bank Offered Rate) is LoU is used to repay the first. It’s just income proof and collateral. Only
1.5 per cent so I’ll have the money at crore rolling over of credit. It exactly fits small personal loans and credit card
3.5 per cent! over and over into the standard def- loans come backed without collat-
But who will give NM a foreign inition of a ponzi scheme. This can eral. For something of the order of
currency loan? A bank abroad? The Punjab National Bank has easily balloon into a larger amount, 11,000 crore you would think they
They don’t know NM. They don’t informed stock exchanges that so large that it’s too much. In effect would definitely ask for collateral.
have any history of NM, so why will the quantum of unauthorised many such arrangements have Ironically, it happened even after
they give him money? So NM goes transactions using the SWIFT turned into semi-ponzi schemes, the experience with Vijay Mallya
to the PNB and says, boss, you’re my platforms could rise by $ 204.25 with one LoU being opened to repay where loans to Kingfisher were
banker, so please help some foreign million or 1322 crore. The bank another and so on. In such a scenar- given on nearly no collateral
bank give me some money to buy had on February 14 disclosed that io, this is what probably happened. (though in that case a house and
diamonds. Say that you will guaran- unauthorised transactions worth Nirav Modi took loans from foreign some promoter shares had been
tee my loan by giving me a Letter of $ 1.8 billion or 11,300 crore, had branches of Indian banks through pledged). Why did the PNB give this
Undertaking (LoU). been carried out from its Brady a LoU issued by the PNB. This was guarantee then? It’s typical — more
The PNB now should be saying House branch. With this, the total done through a SWIFT-based LoU the amount you give as collateral,
look, if you want me to give Rs 100 amount lost to fraud now stands issued through a rogue employee more the guarantee that banks
crore guarantee, you give me stuff at about 12,622 crore. (or many of them) at the PNB. give. Again, the loan was not a “fund-

tehelka / 15 march 2018 36 www.tehelka.com

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