The PNB Scam and Nirav Modi-What happened at PNB and what can we expect next
- In Economics
- 05:43 AM, Feb 16, 2018
- Sharmila Gharpure
Everyone including me was curious about how a bank was duped for 11500 crores. I was shocked at the audacity of the management to have duped the banking system for an amount this big. Throughout the day, I kept on talking to my fellow bankers and on the basis of information I have gathered let me try to explain in simple terms how it was done.
A customer of PNB in connivance of the officer got some Letters of Comfort issued. Letters of Comfort are non-funded exposure of contingent nature. Which means the bank issuing it does not part away with any fund right away but it has to create a contingent liability. This is exposure is taken as per the overall credit facilities sanctioned to the company. Letter of Comfort is also of contingent nature like letter of credit or Bank Guarantee. For the layman, letter of Comfort is issued by PNB to the beneficiary of letter stating the responsibility of making payment in case of default.
Now what has apparently happened is, officers at PNB issued these letters of comforts without booking any contingent liability in their banking software. There is a secure software for financial messages used all over the world called SWIFT. The access to this software is given to authorized persons and there is maker checker concept here. Maker cannot authorize and vice versa. These messages need to be backed by transactions being posted to the banking software. At PNB messages were sent but no posting was done in banking software. There are 100s of such messages that get generated at single ('A' category) branch. It is a responsibility of the handling officers to monitor the link between both these software.
If both officers conspired and sent letters of Comfort through SWIFT messages without posting to the banking software, no one can detect it in PNB. For PNB banking software there is no transaction in existence. That's why no controllers and auditor could find it at PNB till the going was good.
Now at the other end, other institutions gave buyers credit on the basis of these fraud messages. Knowing or unknowingly that they are fraud or lack baking of PNB's credit disbursal system. Till there was no default, the chain was going on. Once there was a default in payment, those other banks came to PNB to invoke the Letter of Comfort. Now the current staff started searching for the contingent liability parked in their accounting software. Which was nowhere to be found. Then someone started looking into similar deals and a scam of huge proportion came to light.
Now, this is a story very simply put at the accounting level. How the staff was lured or pressurized will be known after investigations. In my opinion, it will very difficult to link it to the politicians. After Harshad Mehta scam the banking system was exposed and then the loopholes in it were sealed. After finding out the modus operandi of this scam, I hope RBI will review it and make the system more strong. I have several posts on this matter blaming banks, RBI, Raghuram Rajan, P. Chidambaram, Arun Jaitley and finally Modi. I will urge all of you to wait for the investigations to complete before we blame or defend anyone. The only thing we can expect from this government is the probe is done with sincerity and as fast as possible. Frauds of these nature are usually multi-level and take years to investigate is what we must also keep in mind. There will be new information coming in this matter which will bring more clarity. I hope I was able to clarify at least to some extent.
Image Credits: PNB on twitter and http://us.niravmodi.com/about/brand/founder/
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