PNB Scam Decoded!!! Is the scam really worth Rs 11,400 crores or even more than that?

There has been a lot written about the recent PNB scam in the mainstream media but very few media persons have managed to offer anything new or a fresh perspective towards this scandal that has shook the nation. So, here is a prismatic view of what has been missed by the mainstream media so far.


First things – I know, I may sound a bit scandalous but the figure of INR 11,500 Cr given in the various media reports need further scrutiny. Let me explain using a layman’s example. A man steals money from the vault of an acquaintance without his knowledge and then used to replenish it back before the acquaintance came to notice it. This was done in collusion with one or few of the workers of the acquaintance. It went on for nearly 7 years and it came to light when one of the workers retired and the new worker in his place refused to co-operate. Now since the man who stole the money used to replenish the same at timely intervals, we don’t exactly know the extent of money lost in terms of principal and interest.

This is a simplified analogy of what transpired with the PNB. The figure of INR 11,500 Crores amounts to the fraudulent transactions that took place in the accounts of the bank and not necessarily the financial loss to the bank or the public. The reason being that out of this 11,500 Crores that were transacted, the culprits used to replenish or repay the same periodically or sporadically in order to avoid getting detected. Furthermore, the initial FIR which the PNB filed with CBI mentions an amount of INR 280 Crores is the amount of loss which the bank envisages on preliminary investigations. From what we know, the assets of Nirav Modi group would be enough to clear out these dues or even more than that.

But then is the media just hyping things out? Yes and no. Yes, because as I mentioned the figure of INR 11,500 Cr is being shown repeatedly as the loss due to fraud while that may not be the case. No, because what happened was wrong and many media persons may not be equipped enough to understand the nuances of international banking.

In fact, the matter of the deepest and a much graver concern than the financial loss of money to a bank are the following two points : (1) If the amount to be repaid was as low as few hundred crores, why did a Forbes billionaire had to leave the country along with his family? (2) What was the need for a billionaire businessman heading a reputed brand to do such histrionics while any bank would have easily financed him on the strength of his papers?

Now, these two questions point towards some other aspects. Was Nirav Modi involved in money laundering activities as is being probed by the ED? If yes, then why and more importantly, for whom? Was he transferring money out of India for himself or somebody else? Was there anything more sinister like financing of anti-social or anti-national elements in this entire transaction process? It is these questions which should raise the alarm bells of citizens rather than mere transactions of few thousand crores. It is not the transaction of money that was dangerous but with whom the transaction took place which could have serious repercussions on even our national security.

How did such a scam take place? Can a mere Deputy Manager and a clerk manage to do something of such a huge magnitude? What are the checkpoints in our financial system to prevent and detect such wrong doings and how did this fraud manage to bypass those checkpoints?

Frankly, I don’t have all the answers because there is still a shroud of secrecy being maintained by the PNB management in informing the complete details of the scam. But let us first take a look at the check points to prevent and detect such frauds. RBI has devised a system called IDPMS (Import Data Processing and Monitoring System).

Through this system, it monitors the imports that are taking place pan India and the subsequent foreign exchange remittance being made in lieu of that. The system collates data from all the ports through which import takes place in our country as well as the SWIFT messaging data (the outward foreign exchange remittance system) to finally tally whether all the imports in the country are paid for or are outstanding in payment. This data has to be mandatorily reported and provided by the banks on a quarterly basis. Hence, the statement given by PNB that the transactions took place through SWIFT and no entry was made in CBS as the prime reason for the fraud not being detected does not hold much water. Because even if the transaction is not entered in CBS, the outward remittances done using SWIFT need to be reconciled with the import data and this reconciliation has to be done by the banks only. Apart from that, the transaction goes through multiple layers from branch to the Foreign Exchange Department of the bank and has to be authorized by at least three persons before putting through.

So how come no one had noticed this monstrosity earlier? Also, there is a special mention regarding diamond imports in the RBI guidelines that credit period should not be more than 90 days. So how come it is possible that while reconciliation, the bank never checked for nearly 7 years that a company is importing diamonds on the basis of buyers’ credit through LOUs issued by them? Also, why did the banks providing buyers’ credit overlook the 90 day credit period in case of diamonds? Where the auditors (internal, external, concurrent, and what not) not checking the books of accounts maintained by the branch regarding LOUs issued and tallying them with the SWIFT remittances made – a common auditing practice? Further, Allahabad Bank states that PNB was honouring its liabilities with respect to the LOU till January 5th but stopped it after January 13th (which was the date of detection of the fraud by a junior official who joined after superannuation of the now alleged culprit official).

The allegation by PNB that the foreign banks did not confirm the validity of the LOU with them also casts suspicion on the credibility of banks which have granted buyers’ credit facility to Nirav Modi group. Normally when a letter of undertaking or a letter of credit is issued by any bank to another bank, the receiving bank (Allahabad Bank and Axis Bank in this case) sends a letter of confirmation to the issuing bank just to be double sure. The letters are sent normally to the issuing branch (PNB in this case) as well as the controlling office like Regional or Zonal Office of the issuing bank which is a normal practice of risk mitigation just in case some mischievous or fraudulent or unintended or mistaken letter might have been issued by the issuing bank. This also serves to confirm the name and identity of the customer/party on whose behalf the issuing bank is giving LOU or LC. Whether such practice was followed by the receiving banks? And if yes, why no one was alerted when such confirmation letters were received by the issuing bank?


Prima facie it does not appear that anyone was directly linked to the scam, however, a thorough transparent investigation can only reveal the truth. But what is astonishing is that an Authorized Dealer (or AD category branch as they are called generally are the branches which are authorized to deal with foreign exchange transactions) branch was headed by a junior level scale II officer (Deputy Manager) and that too a person who was on the verge of retirement. I would like to point here that the promotion policies of our Indian banks were tweaked a lot so as to accommodate more people as officers through promotion from the clerical cadre, primarily to fill the huge vacancies coming in the banking sector.

But when the banks were focussing on mass promotions from clerks to officers, what they missed was to train this huge manpower properly to handle the delicate and exacting work required from a bank officer. A clerical staff who would have done manual transactions like debiting and crediting account would suddenly be sitting on a chair where he would need to take critical financial decisions for the bank and when there is a such a huge knowledge and training gap, such kind of fiascos occur with or without the knowledge of the person. Personally speaking, I do not think that a man on the verge of retirement would do such a blunder of issuing LOUs like free samosas to a company and put his retirement life in danger.

Also, the postings of officers in nationalized banks is also done very arbitrarily and no scientific mechanism for identifying the right man with the right skills for the chair is hardly followed anywhere. The angle of oral pressure from seniors to put forth the transactions and issue LOUs can also not be discounted over here. The auditors who would have audited the branch in various capacities also failed in their duty of looking through the books meticulously. In brief, this episode has opened a can of worms which if dug deeper would reveal interesting results and has the potential of changing the way banks would be handling their transactions in the future as also testing the credibility and will of the present government dispensation to bring the guilty to the gallows.

Disclaimer: The views of the article are strictly personal of that of the author.

Ranjit Menon

(The Author is a finance & policy analyst with more than a decade’s experience in banking & finance)