1. Would you like to join the IL team? See open jobs!
    Dismiss Notice
  2. What can you teach someone online? Tell us here!
    Dismiss Notice
  3. If someone taught you via skype, what would you want to learn? Tell us here!
    Dismiss Notice

What Happened In Punjab National Bank/

Discussion in 'Jokes' started by jayasala42, Feb 17, 2018.

  1. jayasala42

    jayasala42 Finest Post Winner

    Messages:
    4,844
    Likes Received:
    9,632
    Trophy Points:
    408
    Gender:
    Female
    Based on an article 'How The 11,400 cr. Import Ponzi Scam at PNB Unfolded' written by Deepak Shenoy

    For the past 4 days all news papers are flooded with a shocking news about one of the largest
    banks in India( next to State Bank of India) that there is a scam of about Rs11,000 crores amounting to nearly 25% of the capital base of the banking company.We hear of LOU( Letter of Understanding or Letter of Undertaking) based on which the fraud is stated to have been committed.We should know in simple language where it went wrong and how.Let’s understand how things work.

    Some importer, let’s call him Nirav Modi or NM, wants to import pearls or diamonds and then sell them. The purchase requires money, so NM approaches a bank, say Punjab National Bank (PNB).

    PNB says look, I’ll give you a loan but it will be like at 10%.interest.

    NM thinks hard and says, no, that’s too much. Wait, why don’t I take a foreign currency loan instead, after all I’m buying in dollars? Much lower interest rates no? It may work out to nearly 3.5% abroad..

    But who will give NM a foreign currency loan? A bank abroad? They don’t know NM. They don’t have any history of NM, so why will they give him money?

    SO NM goes to PNB and says, boss, you’re my banker, so please help some foreign bank give me some money to buy diamonds. Say that you will guarantee my loan by giving me a “Letter of Undertaking” (LOU).

    PNB now should be saying look, if you want me to give Rs. 100 cr. guarantee, you give me stuff worth 110 cr. at least. As collateral.

    But PNB, for some strange reason, doesn’t ask for collateral.

    So now the foreign bank is ready to lend NM the money. Because PNB will guarantee it. And the foreign bank trusts PNB. Why does it trust PNB?

    Because PNB sends a message on SWIFT – the banking message service – that PNB guarantees Rs. 1 cr. of money for 180 days for Mr. NM at an interest rate of, say, LIBOR + 2%. It’s like a message – written in stone, effectively – that says PNB will pay if NM doesn’t pay.

    I wonder how such important instruments are simple messages and not vetted documents.It is a mystery.

    In fact the foreign bank trusts only PNB. So it gives the money to PNBs account with it, called by PNB as a “Nostro” – the account that PNB maintains with banks abroad, where the other bank will send money meant for PNB customers.
    As for the foreign bank, PNB is the borrower.As for PNB, NM is the borrower.


    PNB’s nostro account gets the money.

    PNB then gives NM the money from the Nostro account, usually paid off to whoever NM is buying his diamonds from. This payment is to someone outside India usually, to fund a purchase of diamonds or whatever.

    Note this carefully: The other bank gives money to PNB’s Nostro account. Not to NM. They don’t care about NM. They only know that PNB has given a guarantee on the SWIFT channel.


    The foreign bank would not care whether NM was buying diamonds or bitcoin – to them, PNB would pay back even if NM’s bitcoin wallet got stolen.

    Why does PNB give a guarantee? Fees.
    Each year, a bank may charge upto 2% to give the LoU.

    So What Happens When It’s Time To Pay Back?

    NM has to get the pearls in India, sell them, receive the money and pay PNB. On the due date written on the LoU.

    Then PNB will pay back the foreign bank saying okay, we got the customer’s money so we’re giving it back to you. With interest etc.

    That’s what is supposed to happen. But in reality, things went out of bounds.


    The Reality:

    NM might not pay back at all. NM might use the money to speculate in the markets. Or do something else.

    What if NM in the above example simply didn’t have the money to pay back? Instead, he asks a PNB official to open ANOTHER LoU. For the amount owed plus interest. So if we had the first LoU at $10 million the second one is $11 million to cover the interest on the first.For some fat consideration ,PNB staff had obliged,definitely with the consent of senior boss who also fell into the trap of lust.

    The money from the second LoU is used to repay the first. It’s just rolling over of credit. Over and over. Standard definition of a ponzi scheme.NM has got benefitted through many overseas branches of other banks on the basis of the LOU sent bt by 'SWIFT" messaging system.Around 30 banks other than PNB are also in the net.

    This can easily balloon into a larger amount, so large that it’s too much. In effect many such arrangements have turned into semi-ponzi schemes, with one LoU being opened to repay another and so on.Just like people pledging one jewel after another to repay the earlier loan.This is also 'money lending,the amt being in crores.


    The details are yet to be released full but it looks like:

    Nirav Modi took loans from foreign branches of Indian banks through an LoU issued by PNB

    This was done through a SWIFT based LoU issued through a rogue employee (or many of them) at PNB

    The orders never showed up in the core banking system for monitoring

    LoUs were rolled over all the way since 2011, and possibly increased over time too.

    The rogue official retired in 2017, and the replacement refused to roll over the LoU which came due in Jan 2018 because he couldn’t find the past transactions in the system

    No rollover means a default, since there was no money to pay. So PNB quickly files an FIR saying oh goodness we have lost 280 cr. on the Jan LoUs

    Then someone said, “Boss, is there any likelihood of more such LOU s existing ?Then someone checked.

    Oh,what a pity!It was 11,400 crores.

    Everyone in the bank panicked.

    Why couldn’t Nirav Modi just pay it back? He must have the original money no?

    Because if it was ever intended to be paid back, the rollovers wouldn’t have been required. At some point, things got so out of hand that rollovers were required in order to stay current.

    Typically this would not be a problem. If PNB had done things right, they would have had collateral worth the amount of guarantee, and they would have sold that collateral and paid the foreign bank.

    But, and here’s the real issue: PNB didn’t have any collateral.

    Why did PNB give a guarantee without collateral?

    If you and I go for a loan to a bank, they’ll ask us for income proof, and collateral. Only small tiny personal loans and credit card loans come backed without collateral. For something of the order of 11,000 cr. you would think they would ask for collateral.

    Especially after the scene with Mallya where loans to Kingfisher were given on nearly no collateral (though even there they had a house and some promoter shares pledged)

    Why did PNB give this guarantee then?
    Because nearly every bank is doing it.

    The loan was not a “fund based limit”. In a fund based limit like a term loan, the bank pays out money. In non-fund-based limits, the bank will only pay if someone else defaults or an event happens – like a Bank Guarantee or an LC or an LoU.

    Meaning, PNB assumed that the foreign bank was giving a loan directly to Nirav Modi and that PNB needed to pay only in case Nirav Modi defaulted. So in the eyes of PNB it was always an “non-fund-based” loan.

    But this is how a significant part of import financing works. They all rollover credit, and they all use LoUs for much higher than they can offer as collateral.

    Normally the banks seek collateral upto 6x the amount in case of fund based debts.This is a real problem – that most public sector banks do not keep much collateral against non-fund-based limits given to importing customers.

    So even if a bank has collateral, it’s nowhere near enough. And then, such unfunded liabilities are not even reported to RBI!


    The funded exposure to “Gems and Jewellery” is shown at 1860 cr.

    So, in effect, PNB didn’t reveal that it was funding massive quantities of “unfunded, contingent exposure”. They will of course pretend that they didn’t know, because the transactions weren’t in the core banking system.

    Did Employees Hide it? Was PNB Responsible or was it a fraud?

    Can employees be responsible? Could they have hidden the credit and the rolling over of LoUs? But honestly, how does a 11,000 cr. credit pass muster without top management realizing it?

    Think of it – your nostro account with these other banks keeps getting big credits that add up to 11,000 cr. Will you not reconcile it in the accounting? The “why is this money even here?” question should have been asked by someone who audits accounts, one thinks?

    And the SWIFT messages. It’s a specific kind of message. Why wouldn’t PNB audit the SWIFT trail? Reconcile it with the core banking system? How many more such skeletons will tumble if they do?

    Their excuses are

    Data wasn’t entered into the core banking system. (Of course, otherwise you would have had to report it)

    LOUs weren’t authorized. (Hard to believe, because the amounts are very large. Surely someone on the top would know?)

    The SWIFT system was illegally used. (Again, hard to believe that a bank like PNB would not audit its SWIFT messages regularly. Or its auditors. Or RBI.)

    On the face of it, it looks like the ex-employee is being used as a scapegoat. It’s likely that a lot of people were in on this thing. And that it generated massive, fat fees for PNB all these years.

    Fees wise: Imagine 11,000 cr. worth LoUs being renewed each year – that’s upto Rs. 200 cr. in fees that was all hitting PNB’s top line.

    What’s the Scale of this scam?

    While PNB reported it as a 11,000 cr. scam, they filed an FIR with the CBI for only Rs. 280 cr. This has probably expanded since then but even if the total outstanding is as much as that, there’s a good chance that the actual loss amount will be lesser.

    All of it will be borne by PNB right now. Whether someone abused their SWIFT usage is not relevant, if PNB’s SWIFT message said they will pay, they have to pay if there is a default.

    But think about the fallout. The problem was that some liabilities were not in the system. There could be more such LoUs. From the same branch or others. Other banks could have such LoUs too. It’s trivial to start looking – and we know that Nirav Modi will not be an isolated case.

    Also, the issue was that the limits had no collateral behind them. If all banks are told to verify their non-fund-based limits and demand collateral against them (say at least 25%) then the scale would be absolutely massive. It’s not like this is happening only with Nirav Modi or Choksi. A very large number of importers of commodities have been doing this, and rotating credit. A change in regulation here can change the game dramatically for every other bank (and import account) in the system.

    The simple point: this particular transaction will result in a lower loss than 11,000 cr. for PNB. Because of recoveries and such. But if RBI asks all banks to pull up collateral on such lending and stop such practices, the scale is many times larger.

    The problem really is: There is never just one cockroach. When you go deeper, you are likely to find more dirty, dark secrets, and none of them will be any good.

    This is the Indian public sector banking system. Fix it.

    How can you have transactions on SWIFT outside Core banking System?( CBS)? Fix it.

    Why would you not reconcile the nostro accounts? Suspend the auditors. Fire top management. Fix it.

    Closing the door behind Modi, who’s already left the country, is probably useless. If you find fraud, invoke their personal guarantees, and file cases to attach their personal properties. After that, file in NCLT to make these companies insolvent. Take the hit, and try to recover.

    Find out more such instances where collateral cover is too low. Find out if the LoUs or LCs are just getting rolled over or is the customer actually paying back through the Indian current account. And if not, demand more collateral to avoid further spread of the ponzi.

    But this is quite unlikely to happen because the banking system is going to take massive hits now, and we’re going to have to deal with the fallout of really horrible systems.
    It’s amazing that our banks have been this lax, but they have been allowed to; with no bankers being investigated, the rot inside the banks has been ignored and instead, industrialists have been the target of outrage. It’s time to look at banks as malicious players too, and to fix that rot.

    Who will fix ?

    Jayasala 42
     
    Last edited by a moderator: Feb 19, 2018
    Loading...

  2. Balajee

    Balajee IL Hall of Fame

    Messages:
    5,121
    Likes Received:
    4,035
    Trophy Points:
    338
    Gender:
    Male
    +Not just banmkers but the RBI and the banking regulatory autyhority must come under scanner. Without their active or passive help this wouldn't have happened.
     
    sindmani, joylokhi and GeetaKashyap like this.
  3. GeetaKashyap

    GeetaKashyap IL Hall of Fame

    Messages:
    3,921
    Likes Received:
    9,193
    Trophy Points:
    460
    Gender:
    Female
    @jayasala42

    Awesome post that could make me understand this scam to some extent. Thanks a lot, madam, for simplifying the terms and explaining its implications. I am shocked! It reminds of the saying, "The fence eats the crop." The rate at which the scams are rolling in one after the other I wonder what impact it will have on the credibility of our nation and what will happen to the common man and his fate!
     
  4. Thyagarajan

    Thyagarajan IL Hall of Fame

    Messages:
    6,437
    Likes Received:
    6,738
    Trophy Points:
    470
    Gender:
    Male
    :hello:hats off to madam sister for putting things in better petspective and i trust even a layman can understand what this scam is about and the magnitude.
    Regards.
     
    Vandhuamma, sindmani and GeetaKashyap like this.
  5. jayasala42

    jayasala42 Finest Post Winner

    Messages:
    4,844
    Likes Received:
    9,632
    Trophy Points:
    408
    Gender:
    Female


    Dear Balaji,
    Yes, you are right.unless wantonly done, such a grave error would not have escaped the eyes of any brilliant auditor.
    Persons posted to such seats should not be vulnerable ones.Many suggest transfer of officers within one year.But to get hold of things and to have a clear idea of Foreign exchange transactions ,LOU and Letter of Credits etc documents requires intelligence, quick grasp and reasonable administrative tactics to deal with worthy clients.It will take nearly two years even for a bright officer to have thorough technical knowhow.If the officer is transferred at this stage another new comer has to be trained.
    I do really wonder why Swift transactions do not come under core banking, and if they don't, why are they not audited especially when they deal with huge amounts and chances of mishandling are more.
    Now the blame game has started.The present Govt throws the blame on the previous one .One is capable of encouraging trouble makers and the successor is more capable of hiding them out of the country, and sending them to nations from where deportation is too nigh a possibility.Leave alone PNB, other banks who have have given credits didn't have an iota of doubt.Really ignorant or pretending to be ignorant, I don't know.
    'Tiger is at the entry doors of depositors'.When doubts were raised about the security of depositors, the anxieties were phoo-phooed as the wanton blaming on the present Govt.Now the genie has come out of the well.We are ashamed of the callousness of the bankers and its employees and officers, who are ready to bury the interests of innocent depositors for a few lakhs.Whither is the remedy?

    jayasala 42
     
    sindmani and Thyagarajan like this.
  6. jayasala42

    jayasala42 Finest Post Winner

    Messages:
    4,844
    Likes Received:
    9,632
    Trophy Points:
    408
    Gender:
    Female

    Thank you Geetha Madam and Thyagarajan Sir for their responses.When the bubble burst in US, some years back, it took some time for me to understand the underlining problem.Now as we are more exposed to such criminal activities we are able to understand better.But what is the use? It is just like doing Surya Namaskar after the vision is totally lost.
    Why has this criminal mindset become more common? It kills us and makes us more ashamed of ourselves.What culture is?
    Jayasala42
     
    sindmani and Thyagarajan like this.
  7. Tamrakshar

    Tamrakshar Gold IL'ite

    Messages:
    556
    Likes Received:
    824
    Trophy Points:
    188
    Gender:
    Male
    Wow, you have described the complex matter in a lucid way! I wonder what happens to my fix deposits in the PNB!
     
    Thyagarajan likes this.
  8. madras2018

    madras2018 Platinum IL'ite

    Messages:
    659
    Likes Received:
    1,698
    Trophy Points:
    263
    Gender:
    Female
    Well written, simplified, quite thorough. #PNBScamForDummies

    So coming to the critical question : do you think NaMo & top level bjp leadership knew about Nirav Modi's massive borrowings ? Given the massive scale and that bjp's leaders are practically in bed with Ambanis, i find it hard to believe that they wld not know.
     
    Last edited: Feb 18, 2018
    SCSusila and Thyagarajan like this.
  9. sindmani

    sindmani Platinum IL'ite

    Messages:
    1,561
    Likes Received:
    1,695
    Trophy Points:
    285
    Gender:
    Female
    Very true. Indian banking system is said as best banking system. But it is really sad and heartwhelming to see this state. Bank is the backbone of an economy. This loss of pnb is the loss of people's money . I fail to understand why there is no proper certification and guarantee(collateral) provided to pnb from its borrower that too for such high amounts. even for housing loan of 30 lakhs, trustworthy salary class citizens provide many documents like salary certificate etc. This is a hypocrisy.
     
    Thyagarajan and Naari like this.
  10. jayasala42

    jayasala42 Finest Post Winner

    Messages:
    4,844
    Likes Received:
    9,632
    Trophy Points:
    408
    Gender:
    Female

    Thank you Tamrakshar.
    Jayasala42
     

Share This Page