What is Punjab National Bank Scam/Fraud : Who is Nirav Modi ??

THE PUNJAB NATIONAL BANK SCAM/FRAUD

Who is Nirav Modi?

47-year-old billionaire Nirav Modi, the person at the centre of the $1.77 billion fraud at Punjab National Bank.

Case in a Nutshell- Two Employees of the PNB in Mumbai Branch issued Letter of Credit ( which can be encashed in some other bank abroad in the name of PNB) for Nirav Modi.

Nirav Modi along with his uncle Mehul Choksi encashed these Letter of Credits from PNB in banks like Allahabad Bank and Axis Bank etc in other countries.

What Really Happened? 

• Since Nirav Modi has a Diamond Business he approached PNB to ask for Loans so that he can buy the rough stones from its Suppliers.

It began with diamond firms approaching PNB for opening letters of credit for import of rough stones.

An Letter of Undertaking / Letter of Credit is an assurance given by one bank to another to meet a liability on behalf of a customer.
The LoU is akin to a letter of credit or a guarantee. LoUs are used in international banking transactions.

As per the terms of the Letter of Credit, a common banking tool, PNB would pay the overseas suppliers(of Rough Stones) on behalf on Nirav Modi’s firms within a certain period (typically three months) and recover the money from Modi.

Now Why this Letter of Credit created Fraud if its a banking tool:- Actually in this case Fake Letter of Credits were Issued by some rogue PNB employees from Mumbai Branch. 

Nirav Modi took these Letter of Credits in to foreign Branches of Banks like Allahabad Bank and the Axis Bank  on the back of which these branches gave dollar loans to PNB's Account in their bank which is called the Nostro Account.

From this Nostro Account using the SWIFT transfer the Money was Given to Nirav Modi's Suppliers.

But since Allahabad bank and the Axis Bank were giving Money to Nirav Modi (via Nostro Account) on the basis of Fake Letter of Credits. This whole thing was a Scam.

Such high valued Transactions are to be done through Core Banking Solutions(CBS) where these transactions can be monitored and if found fraudulant can be flagged off.

But in this case the employees of PNB ( who were in coalition with Nirav Modi) used SWIFT mechanism-the global financial messaging service used to move millions of dollars across borders every hour — and bypassed the core banking system (CBS).

Since CBS was bypassed it was not monitored.

This was happening from many years.

So the Issue is Actually release of Letter of Credit which were more than the Worth of Nirav Modi's diamond Business.


How The Fraud Will Hurt Business? 

• Banks will clampdown on credit limits and insurance companies will turn cautious. 
• NPA problem will start increasing exponentially for PNB and other Banks too.
• Bank Run type of Situation might arise for some of the banks especially PNB.

Lets wait for some more Facts to unfold.

Till then this is all you need to know.