Here’s How Nirav Modi Made Fraudulent Transactions to Cheat PNB

So, how exactly did the jeweler and his associated manage to conduct fradulent transaction worth the massive amount?

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The Punjab National Bank is at the centre of one of the largest frauds detected across the Indian banking sector. PNB said in a statement that as a result of these "fraudulent and unauthorised" transactions worth $1.8 billion, other banks appear to have advanced to customers overseas. These transactions amount to $1.77 billion, PNB said.

The transactions are allegedly linked to designer and jeweller Nirav Modi, against whom a complaint has been filed in the CBI.

So, how exactly did the jeweller and his associates manage to conduct such massively fraudulent transactions?

The first part of the transaction involves the borrowers – in this case, Nirav Modi and his associates – approaching the PNB branch in Mumbai for a Letter of Understanding.

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 alleged fraud case, the PNB provided the borrowers with the LoU.

Once the foreign banks received the LoU of Modi from PNB, they approved his buyer's credit. Now, what is buyer's credit?

Buyer’s credit is essentially the money that 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 reportedly says 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.

This is reportedly not the first time that PNB was entangled with trouble emerging from its dealings with the gems and jewelry sector. The bank was one of the lead lenders in the Winsome Diamonds case, where the company’s promoters defaulted on nearly Rs 5,000 crore in bank loans.

(With inputs from BloombergQuint)

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