Nirav Modi Scam: How did he manage to default on loans of Rs. 15,000 crores

“All that glitters is NOT gold, ask Nirav Modi and PNB!”

Krunal Modi: Couldn’t catch-up with the PNB scam? Here’s everything you need to know about it in a nutshell…

On February 14, the entire public sector banking system was shaken by what is believed to be the biggest scam in the history of the Indian banking system. Punjab National Bank, or PNB, (second largest public sector bank in India) identified a ‘gem of a scam’ of an exorbitant amount of over Rs. 15,000 crores, which was orchestrated by Nirav Modi, an Indian diamantaire with the help of PNB officials of the Brady House Branch, Mumbai.

Who is Nirav Modi?

Born in Antwerp, Belgium, Nirav Modi is a billionaire diamond merchant who was ranked 57th in the Forbes list of India’s billionaires in the year 2017 with a net worth of about USD 1.76 billion. He is the founder and creative director of the Nirav Modi chain of diamond jewellery retail stores, and is the Chairman of Firestar International, the parent of Nirav Modi chain, which has stores in key markets all across the globe.

When, and how, did it all start?

The scam began in the year 2011 when Nirav Modi wanted a loan of Rs. 100 crores to purchase diamonds from South Africa. PNB was approached by Nirav Modi who asked for a loan of Rs. 100 crores. PNB agreed to give this loan @ 10% interest rate. However, Nirav Modi felt this was too much and hence decided to take a loan in foreign currency. Here’s where the biggest diamond heist began.

All about the scam!

Let’s continue the story. Nirav Modi went to foreign banks for loan, but was denied, because nobody knew him there. Hence, Nirav Modi came back to PNB and asked them to issue an LoU (Letter of Undertaking) worth Rs. 100 crores. Now what is an LoU? An LoU is a guarantee given by the debtors bank (in this case PNB) that if he/she isn’t able to pay back the loan then the bank is responsible to make the payment to the creditor. This means that Nirav Modi could make purchases to the tune of Rs. 100 crores on credit, and if he would default, then PNB would be liable to make the payment to the seller on his behalf. Usually such LoUs are issued by taking some assets which are worth the amount specified in LoU issued by the bank (known as collateral) (in this case, PNB should have had access to Nirav Modi’s assets to the tune of Rs. 100 crores). But, it seems like PNB didn’t take the collateral from Nirav Modi, and this was the biggest mistake on their part. Now you all must be wondering why Nirav Modi chose to take such a long path when he was getting the loan @10%. The reason for this is that Nirav Modi could get the loan at a mere @2% LIBOR rate (London InterBank Offered Rate) which is applied when loans are taken from oversees banks. Additionally, he would have to pay an interest rate of 1.5% to PNB for the LoUs issued. In all, he would get the same loan which he was getting @10% at a nominal rate of approximately 4%.

Punjab National Bank

How did Nirav Modi scam PNB

Now comes the role of Gokulnath Shetty who was the branch manager of PNB Brady House Branch, Mumbai, who was instrumental in issuing LoUs over the past 7 years. Typically, after issuing LoUs, the bank sends a SWIFT message (Society for Worldwide Interbank Financial Telecommunication) to the foreign bank, stating that they have given the LoU to the debtor, following which, the money gets transferred into the Nostro account of the bank and the transaction gets recorded in the CBS (Core Banking System), which records the transactions, loan given and the collateral against it, etc. The exact same procedure was followed in the PNB scam except for a twist, the transaction was not recorded in the CBS of PNB bank as it was not integrated with the SWIFT message system. However questions are being raised on whether the records were erased from the CBS by the higher officials.

After 90 days (limit to pay back the amount of the LoU), instead of paying the amount due, Nirav Modi asked PNB to issue another LoU covering the initial amount and the interest rate of the first LoU, and this amount was then used to repay the original LoU liability. This process was repeated over and over and over and over again until January 2018. This process is known as a “Ponzi scheme”, where the defaulter raises money from the new lender to pay the amount due to the previous lender. All these fraudulent activities came to light when Nirav Modi came to PNB in January 2018 to ask for fresh LoUs from the new branch manager who was appointed after the retirement of Gokulnath Shetty. Upon investigation, it was then found that the scam had been carried out from 2011 and the amount had become excessively high (Rs. 11,300 crores). The branch manager quickly reported this to the MD of PNB bank, Sunil Mehta, who then lodged a complaint with the CBI. But, by then Nirav Modi had already fled the country along with his family. He had also declared himself as an NRI back in November 2017.

How much has this scam affected PNB?

  1. The fraud is 8 times the bank’s 2016-2017 profit of Rs. 1,325 crores.
  2. It is equal to a third of PNB’s market cap of Rs 35,300 crores.
  3. PNB’s stock was trading at Rs 167 in the beginning of February which plunged to Rs 113 as of 23rd

What has been done till now?

The passports of Nirav Modi and his maternal uncle Mehul Choksi have been terminated. Apart from this, the ED (Enforcement Directorate) seized gems and jewellery from his stores, which adds up to Rs. 5,671 crores approximately. It also seized assets (luxury cars, houses, etc) worth Rs. 94 crores belonging to Nirav Modi and Mehul Choksi. The CBI has decided to hand over the entire amount to the bank. 8 PNB officials have been arrested so far, after the scam was unfolded, and 10 have been dismissed from their duty by the bank. Vipul Ambani, CFO of Firestar has also been arrested.

There are many things which are still unclear, how did the officials at the lower level issue so many LoUs without the higher authority knowing about it? Why wasn’t the collateral taken by PNB even after a similar situation was faced in the Vijay Mallya case? How is PNB going to repay the debt amount? Why isn’t the CBS and SWIFT system still not integrated with each other in India’s second largest public sector bank? Was the government aware about this conspiracy? To pull out such a scam isn’t the sole work of the officials working at the lower level, of course there had to be involvement of the higher authorities. These questions will be addressed as new findings are made about the scam. Keep following!

Also read: http://www.kyabae.com/consumer/9-simple-methods-protect-digital-data-world-cyber-attacks/

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