INTRODUCTION

The smooth functioning of the economy of a country pivots on efficient and good banking of
the country. The banking system in India has not only witnessed rapid growth but has also
witnessed an increase in challenges to banking system in terms of frauds. One such banking
fraud is the Punjab National Bank Scam, which is considered as one of the biggest banking
scams in the Indian Banking history.

The well-known jeweller and designer Nirav Modi along with other senior employees
working in Punjab National Bank were involved in this scam. In order to facilitate the scam,
they had obtained fraudulent and unauthorised LOUs (Letters of Understanding) from the
bank without following the proper prescribed procedure. These Letters of Understanding
were procured with the motive of importing diamonds and creating a high-end collection. 1
The scam was reported by an ex-employee of the bank and the scam caused a loss of 1.8
billion dollars over a period of seven years.2

The objective of this research paper is to study the Punjab National Bank Scam in depth and
analyse the scam as well as its impact on the Indian economy. The research methodology
used in this research paper is secondary where the author has referred various research
papers, articles, reports as well as news articles for the purpose of research.

ABOUT THE SCAM

The scam was brought to the light of the public on the 14 th of February 2018 when The Brady
House branch of Punjab National Bank, Mumbai, declared fraudulent transaction of worth
$1.8 billion or Rs. 11,000 crore. The scam had escalated to over Rs. 14,000 crore by May
2018.3 This scam was executed by Nirav Modi with the help of his uncle, Mehul Choksi, who
was the owner of Geetanjali Gems and Gokulnath Shetty and Manoj Kharat, who are
employees of PNB Mumbai Branch.
The scam was schemed in a manner where a large number of Letters of Understanding were
issued by the Mumbai branch of Punjab National Bank in favour of Nirav Modi as per his

1
34 International Enforcement Law Reporter 523 (2018).
2
“FAQs: What is the PNB Scam?” The Times of India, May 25, 2021, available at:
https://timesofindia.indiatimes.com/india/faqs-what-is-the-pnb-scam/articleshow/82932830.cms
3
“What Is PNB Scam” Business Standard, available at: https://www.business-standard.com/about/what-is- pnb-
scam.
directions to obtain a short term loan from a foreign branch of another bank. These Letter of
Understanding were issued through Society for Worldwide Interbank Financial
Telecommunications (SWIFT). SWIFT is a cooperative society and its main function is to
transmit financial messages between banks while ensuring that the transaction is secured.
Nirav Modi along with his accompanies had misappropriated these Letter of Understandings
to facilitate foreign payment of their offshore suppliers through foreign banks in the event of
non-payment.

Since these LOUs were issued unauthentically, there was no record for the entries in the
Bank’s Core Banking System. The employees at PNB made sure that the SWIFT messages
were delivered to the foreign banks in violation of the three-layered security mechanism of
SWIFT messaging. The flow of transactions commenced from PNB that sent SWIFT to
Foreign Bank, that further pays PNB’s Nostro and PNB pays Modi’s suppliers, who receive
credit and suppliers send diamonds to Modi. Modi further sells the jewels in India and Modi
should ideally honour Letter of Understanding and Punjab National Bank shall pay back
foreign banks with interest.

REPERCUSSIONS OF THE SCAM

This scam left a great impact in the Indian economy specially on the Indian Banking system
and the stock market. A consequence to this is that the investors lost trust and confidence of
investigating on the banks with regards to their transparency. The Punjab National Bank not
only impacted the investors of the country but also the banks of the country. The scam left
numerous banks exposed to credit risk. The most affected out of the 39 exposed banks, the 5
most impacted banks were Union Bank of India, UCO bank, State Bank of India, Allahabad
bank and Axis bank. Punjab National Bank thereby had to pay these banks more than Rs.
11,400 crores as bank guarantees.

The other industries that were impacted by this scam includes jewellery industries and
insurance industries. With this scams came the large questions that were raised regarding the
public sector banks and efficiency of regulators like the RBI and SEBI’s legitimacy and
credibility4.

4
George Mathew, “Punjab National Bank fraud: How the system was gamed” Indian Express, Feb. 19, 2018,
available at: https://indianexpress.com/article/explained/punjab-national-bank-nirav-modi-fraud-how-the-
system-was-gamed-5069107/.
ARTICLE REVIEW
A Case Study on Punjab National Bank Scam
By Dr. Meda Srinivasa Rao and Dr. B. Kishore Babu

In this article, the authors have analysed the Indian Banking Industry with special emphasis
on the Punjab National Bank and its history. The article further talks about various scams
ranging from the Harshad Mehta Scam to Vijay Malaya scam with shedding light on the
Nirav Modi Scam. The article further elaborates that the Punjab National Bank Scam was one
of the biggest public sector bank scam that India had witnessed in the past 70 years, that
shook the entire banking system of the country. The article enumerates the consequences of
the scam with relation to how it had an impact on the market capitalization value as a
consequence of the shock wave that trembled the banking system.

The article also talks about the evolution of the scam which states that the scam was first
reported to the police department by Punjab National Bank on 29th January 2018.
Consequently, on 5th February 2018, a meeting was convened by CBI and the bank notified
SEBI about the ongoing inquiry. It was on the 14 th of February 2018 that Punjab National
Bank publicly announced a fraud of valuation worth Rs. 11,400 crore. The impact of the
scam was felt on the 20th of February 2018 when there was a rapid fall in the share price of
Punjab National Bank. It was on 20th March 2019 when Nirav Modi was arrested in London
after an arrest warrant was issued against the fugitive diamantaire by the Westminster court.

This article also highlights the significance of whistleblowing. Whistleblowing as described

by the author is just an addition to an old phenomenon, which refers to the act of identifying
misconducts leading to harmful effects and complaining to the authorities. The article states
that whistleblowing plays a significant part in good corporate governance.

Due to its huge impact on the economy and the banking sector, it was essential that the banks
and regulatory authority to make sure that this kind of scam does not repeat in the future. This
was important to retain the trust and credibility on these banks and authorities. The remedies
that were sort to overcome such fraudulent behaviour is the practice of underwriting of credit.
Apart from this Punjab National Bank also formulated a vigil mechanism along with a special
team known as “Mission Parivartan” to bring in the change.
Punjab National Bank Scam and Its Effects in India
By Lokesh Uke

This article provides us with not only analytical data but also statistical data relating to the
Punjab National Bank scam. In the article, statistical data from 2013 to 2018 is illustrated to
depict the terrible condition of the public banks in the country. The data enumerates the
aspects of the banking sector that are more susceptible to financial frauds, regardless of
devoting a sufficient amounts on yearly audits with reference to these private sector banks.

The article states that since the past 5 years, India has lost more than Rs. 100000 crore
because of bank fraud. These frauds have a damaging impact on the entire Indian economy.
In the recent times, India is witnessing frequently more banking and financial frauds. These
frauds have a detrimental impact on not only the banks but also the citizens who start
doubting the transparency of the Indian Banking System. Consequently they are responsible
for the decline in the economy, that leads to damaging the country’s credibility that leads to
deprivation of FDI and FII of the country.

The reason behind these increasing fraud rate as suggested by the author is as said by the
economist Vijay Sardana, is the lack of a system that is transparent in nature. It was
suggested that to improve this situation it is important that there must exist a system that is
democratic and well suited for the Indian economic scenario, where the control is not in the
hands of a few people.

Another reason as quoted by ex-RBI Governor Raghuram Rajan and put forth in this article
by the author is that the Indian Banking System still functions on antiquated regulatory
mechanism that is not equipped to deal with the dynamic frauds that are being committed in
the system.

The article also enumerates the numerous impacts financial frauds have on the various
sectors. The first impact being that due to such frauds, customers loose their trust in their
government banks and switch to private banks. The other effect being that the fraud had a
detrimental effect on the country’s reputation in the world economic forum and bank loaning
process. Consequently, it will affect the Indian businesses and will negatively impact the
government’s objective of ease of doing business.
A Critical Analysis of the PNB Scam and its Implications
S. Gayathri and T. Mangaiyarkarasi
In this article, the author has used the management tool 5W2H to study the various elements
of the Punjab National Bank Scam and analysed the factors that accumulated to the
happening of the scam. This management tool, 5W2H is a comprehensive tool that examines
the scam in detail. This uses a divide and conquer strategy by breaking the problem into
manageable elements. This tool aids in acquiring a comprehensive understanding of the
numerous elements of a problem, which enhances the process as a whole.

5W2H stands for Who, What, When, Where, Whey How and How Much. This is a very
simple tool to aid in considering all possible improvement opportunities when attempting to
improve a process. This article also explores bank auditing procedures and potential fraud-
causing loopholes. It also provides an overview of the effects of fraud on different banks and
the overall economy.

Numerous banks now face credit risk as a result of the Punjab National Bank fraud.
Investigation is required to determine how the scam was facilitated and how a small number
of staff working in collusion with clients managed to commit a substantial financial fraud for
such a lengthy period of time without anybody noticing. The PNB scam shows that a
transaction was not sufficiently verified before a non-funded loan was disbursed. The internal
operations of the bank should adhere to standard operating procedures with efficient control
mechanisms.

CONCLUSION
The Punjab National Bank left a huge impact on various aspects of the industry including the
banking industry, jewellery sector as well as the insurance sector. The Indian Banking
System was under tremendous shockwave post which there were certain learnings that the
system should have imbibed to make the system more robust to these dynamic frauds.
The first being the urgent need for banks to improve the way they handle their interpersonal
risks, primarily those related to credit, market, and relationship risks. Second, while also
looking outside banks, many organisations must alter their current behavioural patterns and
general attitudes, focusing primarily on improving internal audits and regulation. Lastly, an
improved central authority control, efficient governance, and vigilance are required to make
sure that another scam of this nature doesn't occur in the Indian banking sector.