Case Study

Punjab national bank scam

Brief and history:-

On feburary 14th 2018, Punjab National bank (PNB), disclosed that it

had been defrauded out of roughly 1.8 billion dollars. This news
shook the nation and all eyes turned to the culprit Nirav Modi, a rich
diamond tycoon. This article details the true nature of the fraud, its
repercussions and just how Nirav Modi and his associates pulled off
one of the biggest bank scams in Indian history.

What is this fraud about:-

The PNB scam is basically a case of financial fraud that was commited
by Nirav Modi and his associates who colluded with senior Punjab
National Bank employees. To better understand the fraud and what
it is all about we have to understand certain other basic concepts
first.

SWIFT Transfers:-

Society for worldwide interbank financial

telecommunications(SWIFT) is a cooperative society headquartered
in Belgium. The primary role of SWIFT is to carry secure financial
messages from one bank to the other.That is, if one bank wants a
messages in a safe and secure way, without altering the message.In
the case of PNB, two employees directly used SWIFT to move
millions of dollars across borders every hour_and bypassed the core
banking system(CBS) which processes daily banking truncations and
post updates.

Letter of Understanding

Letter of understanding(LOU) is basically an instrument used by

importers to carry out their business.In the case of PNB, the LOU’
were issued in favour of Nirav Modi bypassing the bank’s reporting
system using SWIFT messages to overseas bank without
authorization. Nirav Modi, with the assistance of senior PNB officals,
was able to obtain LOUs without submitting any securities. These
LOUs were then subimitted via SWIFT messages to banks in other
countries.

Impact and resulting aftermath

1. PNB was essentially left holding bank guarantees worth in

excess of Rs 11,400 crore which it has to pay to a multiple of
different parties including the state bank of india. Allahabad
Bank and union bank. The said payments were expected over
the next few months.
 2. Furthermore, the banking sector, jerwllery sector and the
insurance sector were stunted with serious negative
repercussions after the finding of the case were reported to the
public.
In response to all the Reserve Bank of india immediately
banned banks from issuing guarantees in the form of letters of
understanding(LOU) to prevent any further misuse of the
medium.April 30, of that, Nirav Modi was charged with criminal
conspiracy, cheating, dishonesty, fraud, breach of trust and
breach of contract and was arrested in londan after the release
of an arrest warrant against him.
Impact on the stock market
The overall value of PNB’s fraudulent transactions was said to
be nearly 50 times that of the bank’s 2018 end third- quarter
net profit of Rs 230.11 crores. In particular, there were five
notable banks that had been directly impacted by the fraud as
they had offered credit based on the LoUs that had been issued
at the behest of PNB. The said institutions were UBO bank,
Allahabad Bank, Axis Bank, Union Bank of india.

Conclusion:-

The PNB scam has left a more than a noticeable dent on India’s
banking sector. A positive outcome of this is that the government is
more watchful and attuned to the banking sector and its varous
happenings. The scam also gives both the government and the
reserve bank the opportunity to enact reforms. While the fugitive
economic offenders act is certainly a good start, it must not be the
only legislation enacted in this regard. It is crucial that we continue
to push for prevent old and well- established banks like the PNB from
having their reputations soiled in the coming future.
Himanshu Sain-MBA-1st Sem.