As India's second largest state-owned lender Punjab National Bank (PNB) finds itself in the centre of the country's largest bank fraud – involving billionaire jeweller Nirav Modi and his uncle, Mehul Choksi – one question baffling many is how they managed to steal more than Rs 11,000 crore.
In a complaint to the Central Bureau of Investigation (CBI), PNB said Modi and the companies linked to him colluded with officials of the bank to get letters of undertaking (LoU) to help fund buyer’s credit from other overseas banks. The funds – ostensibly raised for the purchase and sale of diamonds – were not used for that purpose, PNB alleged.
So, here's a simple three-step guide to understand how Nirav Modi, Mehul Choksi, and related entities managed to swindle a whopping Rs 1,13,00,00,00,000.
The first part of the “fraudulent” transactions involved the borrowers – in this case, Nirav Modi and his associates – approaching the PNB branch in Mumbai for an LoU.
An LoU is a promise that any bank gives to its foreign lenders, vouching for the borrower’s credibility. The LoU promises the foreign lender that the said bank will pay the amount in case of default by the borrower. In the Nirav Modi case, the PNB provided the borrowers with the LoUs.
Once the foreign banks received the LoUs of Modi from PNB, they approved his buyer's credit.
But what is buyer's credit?
Buyer’s credit is essentially the money that one takes to begin creating a product. This amount was credited to the PNB’s nostro account.
The borrowed money reportedly does not reach the borrower (Modi and associates), but remains in the nostro account and is transacted directly to the suppliers. The borrowed amount is paid back only when the borrower exports the finished product.
The money received on export will be used to pay back the buyer's credit.
The "fraudulent transaction" here is that when Modi and his associates received the LoUs, they did not have the documents or sanctions of credit that were required.
The FIR registered reportedly said that they did not have the necessary sanctions for the loan he received, nor did they have any deposits or long-standing relationship with PNB.
The PNB lodged an FIR with the CBI on 29 January 2018, and the scam came to the fore only on 14 February. However, according to officials, Nirav Modi and his family had already fled India in the first week of January.
The CBI also arrested former PNB deputy manager Gokulnath Shetty and single window operator Manoj Kharat in connection with the fraud, as the agency – along with the Enforcement Directorate – continues its raids at various locations.
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