PNB fraud
mathai | 20 Feb 2018

RBI Let us start at the top. What exactly has the RBI been doing? Nirav Modi's loan account probably would have been one of the biggest in the branch, so there's no way the it would have skipped RBI's attention and inspection.

But did the RBI ever comment on the risk of default of this huge borrower? Were any precautions suggested by the Reserve Bank of India? Wasa detailed study done on the performance of the diamond industry before disbursing such huge loans? Aren't these things elementary and expected from India's top bank?

Letter of undertaking (LoUs) have been issued in the past too. Did rbi look for a credit appraisal and ensure a proper sanction ? did they see what the securities are ? did they confirm that the goods expected to be imported did arrive and was properly hypothecated to the bank in these past lou . did they rule out the chance that past lou were cleared just by book adjustments?

PNB head office

Let us come down to the bank head office . credit monitoring set up in ho should have done all that rbi inspection is supposed to have done. in fact they should have done it first. it is the basic responsibility of the on line monitoring group , the inspecting officers and the sanctioning authority. RBI's role comes in much later.

Incidentally it will be interesting to know what exactly the terms of sanction of this LoU facility to the company are. What are the securities? What are the other conditions if any? What is the time frame for completing the underlying transaction, viz imports? Is it possible that this facility was never mentioned in the credit reports submitted to the sanctioning authority and therefore never sanctioned by an appropriate authority? 

Most glaring omission, however, is that this LoU facility was kept outside core banking solution platform. Is it the case that non fund based facilities are not enabled in CBS? Is it that only LoU are outside CBS?

Most surprising thing, however, is that the ho probably had no means to know of transactions done out side CBS. given the fact the every bank had a system of getting regular reports of transactions done outside CBS. And if PNB was an exception that needs to be explained.

PNB branch

Let us come further down to the branch. Isn't there a way for the branch in charge to know what facilities are being enjoyed by one of the biggest loan customers of the branch? Isn't it his duty to send credit reports to higher authorities for sanction? And to ensure that terms and conditions of sanction are adhered to?

Just as a test case will the branch in charge reveal how many times he visited the unit, inspected the stock or reviewed the stock inspection reports of his juniors? And whether he ever noticed any comment regarding imported goods being stored separately or not found at all?

Are we to believe that branch in charge never knew of the swift messages and that he has never heard of LoUs originating from his branch.


Let us go up now to the topmost layer, the government. I deliberately kept it for the last as it is the most difficult stake holder to handle. It is that part of the sky where unprofessional lies fly around. For example note that this fraud originated in 2011. This LoU which devolved on the bank in early 2018 had its origin in 2011. This LoU which was issued for a period of one year fraudulently, as against the normal validity period of 90 days, dates back to 2011!

Then the silence on the claim by a whistleblower that he sent an alert in 2016. Then the explanation that in international meetings anyone can barge into the group photos with the PM and that it doesn't imply anything and the unexplained coincidence that every one of the big enough defaulters left the country just in time to dodge the law enforcement agencies of this country.

And the declaration that no loan which could turn NPA was sanctioned after his government assumed office and most interestingly the stubborn silence since then. Probably his vow not to break it on mundane things like a bank fraud of a few thousand crores.


Finally a word on the media. They are the people who give us stories. They paint it in choicest colours. Initial breaking news was that it originated in 2011. We waited for the links to Nehru or at least his family. Then came the expert opinion that one year validity of the LoU is what the fraud is all about. Had it been the normally permitted 90 days nothing would have happened. Then the story broke that a manager sitting at his desk for unduly long period managed it solo using his swift password and understandably nothing else. Waiting for more breakneck news


PNB fraud is astounding, as usual system's failure is evident and as usual the whole thing may end with the crucifixion of a manager or two. And that, in brief, is the biggest malady the banking industry is facing