As his given name implies, Nirav Modi is known to be a calm and reticent ‘gentleman’. Even his business dealings with PNB have been indeed very quite!
Before the common understanding could veer towards the $1.8 billion fraud in Punjab National Bank at the hands of famous, and now infamous, jewellery designer and retailer Nirav Modi, the public sector bank claimed to have discovered a fraud. It released this information by converting itself into a clever detective, while revealing its problems at multiple levels of functioning. The disastrous fact is that the 11 thousand crores lost via these fraudulent credit exchanges is about 1/3rd the value of PNB (based on its stock price). The problem of public sector undertakings in India is not merely their sloppiness and inefficiency, it is also grounded in the mutual corruption ultimately affecting the taxpayers, while scammers like Mallya and Modi go scot free while lounging in foreign countries. Many suggest that the two week period between the discovery of the bank fraud and Nirav Modi’s escape could also be a result of further collusion with political contacts or PNB officials. Our knee-jerk response has been to shift the blame to the lower level PNB officials who gave access of their passwords to Modi’s employees to use the SWIFT international money transferring system. This means that they could completely bypass the 24 hour monitoring of the Core Banking Solution or CBS.
Some news channels further break down the scam to explain that Modi operated through Letters of Credit issued by PNB, which were then given to the overseas branches of two Indian banks, meaning that PNB would have an account in these banks on the basis of which these banks would pay Modi. PNB (or its officials in Mumbai) gave Modi these Letters of Credit without keeping collateral in exchange, even though keeping collateral is essential in this procedure. This is how Modi could import diamonds mainly from Antwerp, Belgium without any hindrance or clearance of debts (according to a report by The Economic Times). On 25 January 2018, the “PNB realized that it had no official record of these Letters of Credit issued” (Anuj Srivas and Ajoy Ashirwad Mahaprashasta) in its name. This essentially means that the overseas banks loaned money to PNB which held it against the absent collateral of Nirav Modi until the latter would repay them, and no payment arrived at PNB.
This scam is not one of its kind. Previous scams by the likes of Jatin Mehta have been recorded in banking history. There is another problem with keeping diamonds as collateral, as has been explained by Supreme Court advocate M.V. Kini, “Diamonds as a security are susceptible to fraud. It’s almost intangible. Bankers have no expertise in estimating the value of either rough stones or polished jewels and are not trained to differentiate between synthetic diamonds and natural ones either. As a moveable asset class, where lots of precious stones can look very similar, there is more chance of fraud and duplication.” Another phenomenon called round-tripping, in which businessmen export their products to their own companies abroad and then import them into the country, exposes another gap in surveillance and punishment. The tragedy becomes more evident when seen in the context of small scale industrialists—they are not given loans believing that they would be unable to repay them while big businessmen like Modi face no such qualms and are responsible the worst frauds possible. These loopholes in the system have been previously pointed out by the RBI, but no corrective measures were implemented. “The reason why the RBI’s advice from five years ago is so important is that if a system of fast reconciliation and close monitoring of Nostro accounts – which Nirav Modi and his family associates used to fraudulently take out $1.8 billion – had been put in place, the PNB management would have detected this scam much earlier. It is precisely the lack of monitoring of the Nostro accounts that made this scam so big. It appears the banks did have a clear idea of the risk way back in 2013 when they went to RBI with the problem,” M.K. Venu explains. Nostro accounts are the ones accessed by the SWIFT banking system wherein money can be exchanged directly internationally, without government surveillance.
Meanwhile Modi has agreed to repay 6-7ooo crores of the money, which is not sufficient by any means. The CBI is planning to act on the FIR filed against Modi, his uncle and the owner of Gitanjali jewels, Chuksi, and Modi’s wife, by the PNB. The government undertaking is also suffering badly in the stock market on account of its breakdown of trust. When will these structural irregularities be put in place? How many more scams must we experience before we put the proverb about digging a well only after the village is on fire, to action? It is highly unlikely that Nirav Modi will face any ire. It is not like recovering black money from Mallya after the massive exercise of demonetisation, was successful. After a poor economic year on account of demonetisation, GST, and now this scam, what else should we look forward to?
– Contributed by Tript
Picture Credits: asianage.com