Submit :
News                      Photos                     Just In                     Debate Topic                     Latest News                    Articles                    Local News                    Blog Posts                     Pictures                    Reviews                    Recipes                    
PNB scam: The biggest banking fraud in the history of independent India!
Newspapers and TV channels are blaring away that over Rs 11,000 crores of public money has been looted by one single individual.

The country's two biggest political parties, one on victory path and the other being vanquished, are at logger heads trying to grab each other by the throat crying hoarse that it was them who are responsible for the fraud.

I will not go into how and why the beneficiaries of the fraud got away. That is a different story altogether. I will stick to the modus operandi.

The world may have increasingly resorted to technology. But somewhere in the end there is a human being overseeing it or managing it. If that one human being is corrupt or illogical or seeks revenge then consequences can be a holy mess. That is what happened in this case.

It is not so much as Nirav Modi who is responsible for this, though, undoubtedly he is very much the beneficiary.

One person, Gokulnath Shetty, Deputy Manager, PNB is responsible for the PNB cap loss of almost Rs 9000 crore.

Last but not the least the cracks have become visible in the entire banking system. The invisible trust factor that was holding together customers and the banks no longer exists.

I was in employment of State Bank of India for 23 years. I remember an incident that happened while I posted at the Coimbatore branch in 1979. My branch manager wanted to give bank guarantees or co-sign documents to that effect on seller's credit extended by IDBI bank. The amount was about Rs 10 lakh spread over a period of three years. The payments were to be made every half year. The proposal was declined by the higher ups. But the branch manager went ahead and signed the undertaking. In the meanwhile, he was transferred. 

The first bill came up for payment but there were no documents to show the commitment and liability. No accounting entries were passed for the commitment and unless that is done no bank can know about such commitments. All hell broke loose.  An investigation was ordered.  The branch manager was initially suspended and later terminated from service. 

Nirav Modi's case is also a very similar one.

I am sure such things are happening in some branch or the other. Corruption, enticement, greed - human weaknesses are the reason.

Let us understand the transaction first.

Nirav Modi wants a credit.  Without collaterals no bank will give anything away.  As common people all of us know that.

So he cultivates Gokulnath Shetty with probably some huge money. Shetty falls for it. He was the person incharge of SWIFT (Society for Worldwide Interbank Financial Telecomminication) messaging process whose members are only banks or financial institutions. He decides to oblige Nirav Modi by sending a SWIFT message to a bank preferred by Modi. The bank at the other end receives the SWIFT message in MT 760 (a code for bank guarantees or letters of credit). There is normally no re-verification since SWIFT is a highly confidential messaging process. The bank calls Nirav Modi and gives him the bank guarantee. Now Nirav Modi takes it to another bank or may be even the same bank which received the SWIFT message and on the basis of the bank guarantee, which now becomes undisputable collateral, Modi demands a cash loan.

Remember, no cash is transferred or no wire transfer of money is made. That is how the branch itself remained in the dark. When there is a receipt or payment of cash or in any other mode, it is not possible without an accounting entry being passed because the transaction is fund based.

Bank guarantees and letters of credit are non-fund based. The accounting entries are contra entries meaning a debit and credit is generated to balance the transaction i.e. debit customer's liability for bank guarantee issued account and credit bank's liability for bank guarantee issued account. Only when it is invoked, payment is demanded by the bank holding the bank guarantee.

So there is no increase or decrease in any measurable asset of the bank for this particular transaction.

Bank guarantee has a unique characteristic. It cannot be declined.  The issuing bank is duty bound to honour the payment within 24 hours with no questions asked.

I will give you a verbatim of a portion of such a bank guarantee:

"Not withstanding anything contained herein, the bank undertakes to honour, a demand in writing on or before the date of xxxxxxx, invoking the payment under this guarantee, without any demur, contest, recourse or protest and without any reference to the applicant, an amount equal to or not exceeding the amount of xxxxxx".

Therefore, the bank issuing the bank guarantee has no option to deny payment.  Even the applicant for the bank guarantee cannot stop the payment.  That is why the banks at the other end will happily finance against a bank guarantee.

The deal was not between PNB and Nirav Modi.  The deal was between Nirav Modi and Gokulnath Nath Shetty, an individual official.

In no bank across the world can a fraud of such type be totally avoided or prevented. It has happened. It is happening. It will happen in the future too.

As a Doctorate in International Finance and as a Consultant /Corporate Trainer of international repute, having conducted more than 250 programs on 'Letters of Credit' and 'Bank Guarantees' across different countries, I am absolutely certain that the reason for the fraud is not the system, it is also not the law, is certainly not the supervision... but the greed of an individual, the human interface in the technology, which is the root cause of the fraud.

And PNB may not have seen the last of the claims against it yet.

But nobody is talking about Gokulnath Shetty or his whereabouts or whether he has been arrested or whether his passport has been suspended or revoked.

Only Gokulnalth Shetty can tell us how many he issued, the total amount involved and how many have not been invoked.

The weakest link in the technological revolution is the human interface. So can the silly political parties stop blaming each other and get down to finding ways and means to strengthen the system, please!

Email Id
Verification Code
Email me on reply to my comment
Email me when other CJs comment on this article
Sign in to set your preference
merinews for RTI activists

Not finding what you are looking for? Search here.