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Thursday, February 22, 2018

AIBEA Writes To FM on PNB Scam

 All India Bank Retirees Federation writes to FM as under.....                                                                                                                           Ref:2018/018                                                                         Date : 22.02.2018

     Shri Arun Jaitley
     Honourable Finance Minister
     Government of India
     New Delhi

    Respected Sir,

                        Re LOU related scam in Punjab National Bank 

It is being widely reported in print and electronic media that a few diamond    merchants have committed fraud of fraudulent letters of undertaking in Punjab National Bank which is likely to cause financial loss of about Rs. 11300 crores or even more to the Indian banking system. It is also reported that the concerned diamond merchants left the country after the scam got unearthed. It is also being claimed in media that it is the largest banking scam in the history of Indian banking. Simultaneously, some other frauds  like Rotomac etc. are also appearing in newspapers.

2. These disturbing reports about Indian banking system  have created panic like situation among the common man in particular the senior citizens/ retirees who keep bulk of their savings in the form of bank deposits and are dependent on interest income for managing their day to day life. This panic like situation gets further fuel by rumours widely in circulation that more scam are in store, public sector banks may place some restrictions on withdrawal of deposits as done during demonetisation period etc. As you know there are already  many adverse reports in media about public sector banks because of very high NPAs, many of these banks being placed under PCA, increasing losses of PSBs quarter after quarter  and the largest bank of the country SBI also reported loss for the quarter ended December, 2017.

3. However, we do not find any official version on the scam and other adverse news from Finance Ministry,  Reserve Bank of India , bank managements, Indian Bank Association to give official position on these incidents to calm the sentiments of the public and to create confidence among them  in banking system. We therefor request to ask these agencies to release official statement/ advertisement to give real position in the matter for the knowledge of the public. Our organisation represents about 1.70 lakhs retirees who have kept their savings in PSBs and are feeling highly concerned on getting such disturbing and adverse news with added input of panic rumours.
  
4. We also  find from newspaper reports that PNB management has issued orders to transfer 18,000 staff as a preventive measure from vigilance angle. While we appreciate govt./ management concern on preventive measures, we strongly oppose such large scale disturbance of manpower which will result into innumerable human problems, demotivate the staff and huge financial cost involved in such transfers without serving any real purpose. It may be added that the same staff brought first prize for the bank from CVC in 2017 only.
                            
                                                                      Yours Sincerely,
                                                          
                                                                    


                                                                       ( S.C.JAIN)
                                                                GENERAL SECRETARY

c.c. to The Governor , Reserve Bank of India

c.c. to The Chairman Indian Banks’ Association

c.c. to The Convenor UFBU

                                                 


  ALL INDIA BANK EMPLOYEES' ASSOCIATION
Central Office:  “PRABHAT NIVAS”    Regn. No.2037
Singapore Plaza, 164, Linghi Chetty Street, Chennai-600001
Phone: 2535 1522    Fax: 4500 2191,  2535 8853    Web: www.aibea.in
e mail ~ chv.aibea@gmail.com & aibeahq@gmail.com




AIBEA/GS/2018/16                                    21-2-2018


Shri Arun Jaitley,
Hon Minister for Finance,
Govt. of India,
North Block, 
New Delhi

Dear Sir,

Punjab National Bank and its ‘NIMO’nia

We write this communication to you with a lot of agony and anguish over the recent fraud and day-light robbery that has taken place in a Mumbai Branch of Punjab National Bank, an otherwise well-managed Public Sector Bank and the reported magnitude of Rs. 11,400 crores in the fraudulent transactions via unathorised LoUs.  It is agonising because such an alarming fraud has happened in a major Public Sector Bank.  

Besides the possible loss to the Bank on account of this fraud, this would also seriously affect the reputation of public sector banks and people’s perception about our Public Sector Banks.
Ever since major private sector banks were nationalised in 1969, our Public Sector Banks have travelled a long way in changing the profile of banking in our country. From class banking in those days, it has transformed into mass banking today where larger sections of common have access to banking services. Under Jan Dhan Yojana, banks have reached further population hitherto not covered by bank accounts.  As you have been rightly acknowledging in many fora, the Public Sector Banks alone have taken this task seriously with their commendable achievements in mobilising such accounts. 
Public Sector Banks have not only become the reservoirs of pooling people’s hard-earned savings but also the storehouse of their faith and confidence. Such incidents will act as a damper and dent the image of PSBs.

From All Indi Bank Employees Association, as the largest and oldest trade union of bank employees in our country and as one deeply committed to the efficacy and success of public sector banking, we may clarify to you and through you to the people of this country at large, that we do not support any type of such frauds which will harm the interest of the Banks, rather we denounce such acts. 

But, it is a sorry state of affairs that with all the time tested rules, systems and procedures, such deceit and racket could happen in Banks, which we believe is mainly due to gross neglect of all necessary supervision, control and monitoring at various levels of the Bank including at the top management level. 

We find that there are attempts afoot to explain the entire fraud as one committed in one Bank in one Branch by some lower level staff but it would be a total travesty of truth, because the transactions of this nature and magnitude cannot be confined to the precincts of a branch alone.   Many other levels of checking, 

supervision and control aspects are involved in these types of sensitive transactions and what has happened is a combination of systemic and systematic failure of these control aspects.  
We strongly demand that responsibility and accountability for the fraud should not be narrowed down to the desk officers in the branch but must necessarily and essentially cover higher levels of supervisory authorities and top officials for bringing the Bank to such utter shame in the eyes of the people because of their gross negligence.

We also find that only some branch level staff are placed under temporary suspension by the management ( which ought to be ) but which gives an impression that no higher-ups are part of this nasty episode.  

Sir, matter requires your personal intervention to ensure that no one, however higher in authority they may be, is spared at all.  All those who are suspected to be involved or found responsible for such a glaring negligence including the top management should be kept out from the scene till everything is properly investigated.  

Singling out the lower-level staff has demoralised the workforce in all the Banks and they feel that when good things happen garlands go to the top bosses and when there is trouble, lower-level staff are made to bear the burden of all ignominy.  We are sure that you will agree that this should not be so.  

You are fully aware that there is a strong audit system in the Banks like daily concurrent audit by an outside Chartered Accountant, periodical internal audit, revenue audit, external audit, statutory audit, RBI audit, Long Form Audit, etc.  If audit cannot help to detect such fraudulent transactions of huge proportion, it loses its meaning.  Earlier RBI was appointing Auditors to audit the Banks after lot of scrutiny. Now, under the liberalisation era, Bank top managements are allowed to appoint External Auditors of their own choice.  Our repeated objections in this regard were ignored.  

Sensitive transactions like reconciliation of Nostro account, etc. are always on priority radar of the Banks and RBI as well.  If they have been overlooked, then by whom and why? RBI cannot escape from answering its accountability in this episode.

There is another aspect that we would like to bring it your kind attention.  The scope of functioning of the Boards of Directors of the Public Sector Banks.  It has been grossly diluted in the recent years – another effect of liberalisation era.  Powers of the Board are concentrated in the hands of few in the name of Committees.  Many important aspects of control and monitoring are relegated as routine agenda.  Here also AIBEA’s repeated submissions have been ignored.

You area quite aware that under the Banking Companies (Acquisition and Transfer of Undertakings) Act 1970 and 1980, The Scheme of Management of Banks includes appointment of Workman Employee Director and Officer Employee Director on the Boards of each public sector Bank.  Right from 1970/1980, these appointments were being made.  These Employee Directors have been playing the role of a watchdog.  Unfortunately, after the NDA Government came to power in May, 2014, not a single appointment for these posts have been made.

The result is that today in all the 20 Public Sector Banks the post of Workman Employee Director and Officer  Employee Directors are vacant.  For example Workman Employee Director post is vacant in 
Union Bank of India from April, 2014 
Canara Bank from October 2014 
Corporate Bank from December, 2014 
Punjab and Sind Bank from November, 2014 
Bank of India from July 2015 
Oriental Bank of Commerce from January, 2016 
UCO Bank from February, 2016 
Punjab National Bank from March, 2016 
Indian Bank and United Bank of India from May, 2016 
Vijaya Bank from July 2016 
Bank of Maharashtra from June 2016 
Allahabad Bank and Central Bank of India from July 2016 
Syndicate Bank from August 2016 
Andhra Bank from November 2016 
Dena Bank from September 2017

In all these Banks, All India Bank Employees Association is the recognized and verified majority union and as per the Scheme we have submitted the panel of names.  
We know not know why, but the fact remains that till today, the appointments have not been cleared. 

In SBI, Bank of Baroda and Indian Overseas Bank also, these posts are kept vacant.   Similarly, in all these 20 Public Sector Banks, the posts of Officer Employee Director is also vacant and not filled up even though the panel of names have been recommended to the Government  by the respective Banks.  

Our repeated plea in person and letters have not yielded any result. 
Naturally on wonders whether the Government does not want such watchdogs in the Bank Boards even though the appointment is statutory requirement under law.
Another issue which is matter of serious concern to us is the suggestion from ASSOCHAM/Associated Chamber of Commerce and from FICCI/Federation of Indian Chambers of Commerce and Industry to privatise the Banks since according to them public sector banks are not efficient enough to continue.

The long history behind the nationalisation of banks need not be narrated here but suffice it to say that our Public Sector Banks have become pillars of our economy and they are important nation building institutions.  They have played a very significant role in our country’s economic development besides being the custodians of people’s money.  

During the global financial crisis in 2008 where so many private banks in different countries collapsed like pack of cards and created financial sector tsunami, our Public Sector Banks helped to insulate our economy from that devastating crisis. 

Ofcourse, our PSBs have to be further strengthened, expanded and their efficiency further toned up to meet the present-day requirements so they become effective engines to propel further growth and development.  PNB-NIMOnia is a serious accident but in no way it is related to ownership issue.  

No one can forget the role of private banks in various scams in the past.  In fact they were the epicenter of such scams in which common people lost their precious savings.  It cannot be out of memory of the people in our country that in the last 4 decades about 40 privately owned Banks have collapsed due to mismanagement by the private owners and yet ASSOCHAM and FICCI are wanting the massive PSBs to be handed over to private hands.

It is also in the record of our Parliament, that due to the large-scale failure of private banks between 1949 and 1960, the then General Secretary of AIBEA Mr Prabhat Kar, who was also a Member of Parliament at that time, raised the issue in the Lok Sabha in 1960 when Shri T.T. Krishnamachari was the then Finance Minister.  After debate, the Parliament amended and added a specific clause (Section 45) in the Banking Regulations Act by which RBI was enabled to order moratorium on such private Banks facing liquidation and merge them with other Banks in order to save the money of the Depositors of those private Banks.  This is the story and history of private banks.

Further, you have been battling with the demon called NPAs in the Banks and the Government is taking various measures to somehow tack this alarming increase in bad loans in Banks.  
Recently, Government has gone to the extent of bringing an Ordinance to amend the Banking Regulations Act to foist insolvency and bankruptcy proceedings against the defaulting corporate borrowers.  It is in public knowledge today that all the defaulters referred to the NCLT for initiating insolvency proceedings are well-known private corporate companies.  

They could not repay the loans taken by them from the Banks and ASSOCHAM and FICCI want the Banks to be handed over this private sector as though they are more efficient !  It is like pot calling kettle black !

It is also a matter of record in our country that in all major bank frauds so far, there is an irrefutable role of private companies who have been the beneficiaries of such frauds.  Vijay Mallay of Kingfisher Airlines, Jatin Mehta of Winsome Diamonds and now Nirav Modi are just few glaring examples.  There is no bank fraud where public sector companies are involved.

The private sector in our country have built up their huge superstructure deriving all facilities and benefits from public sector infrastructure.  
It would not be unjustifiable when we demand that let the private sector companies who have taken huge loans from the Banks and are defaulting the same first repay the loans efficiently and then talk of the efficiency of public sector banks. It is the corporate delinquency that has burdened the Banks with Himalayan NPAs due to which our PSBs are suffering from and due to which Government is compelled to recapitalize the Banks. 
Sir, here we would like to recall our delegation to you a few months back when you instantaneously stated that so far as the present Government was concerned, there is no question of privatising the PSBs and the issue is how to make them more efficient.   We are sure that the Government would deal with the claims of ASSOCHAM and FICCI accordingly.  

We may hasten to add here that AIBEA is for ensuing a vibrant public sector banking in our country and we shall support all measures taken towards the same.

Before we conclude this important communication to you, we would like to draw your kind attention that in the last few days, the media is replete with reports that Central Vigilance Commission has directed the Banks to transfer enmasse all employees and officers immediately if they have remained in a branch for more than 5 years or 3 years as such.  This is nothing new and already such guidelines are in place which are being implemented by the Banks regularly and periodically.  

There are always exceptions in few cases like physically handicapped employees, staff having some ailments, staff who are indispensible for want of suitable replacement, etc. If there are instances of any one not rotated they can be done now.

But taking a cutoff date of 31-12-2017 as given by CVC and effecting such transfers in a mass scale would distabilise the functioning of the Bank Branches in a big way especially when employees and officers in the Banks are covered by MoU to turn around the Banks and are engaged in recovery of loans, etc. The Bank managements are also struggling to cope up so that Banks show better performance as on 31-3-2018.  

At thus crucial juncture, concentrating on HR issues and transferring the staff from branches will dislocate the working of the branches and would be counterproductive besides involving avoidable costs.  

We shall thank you to intervene in the matter and effect suitable advisory toe Banks in this regard. 

Sir, we area sure that our submission would receive your special and personal attention and needful action will be taken.
Thanking you,

                                                                           Yours faithfully,  

C.H. VENKATACHALAM                                                
GENERAL  SECRETARY

Saturday, February 17, 2018

Try To Understand PNB Fraud

Every Indian Should Read & Understand Before Blaming AnyOne....

What actually happened in PNB scam? Let’s start from the concept.

First, The Concept

Let’s understand how things work.

Some importer, let’s call him Nirav Modi or AnyBody , wants to import pearls or diamonds and then sell them. The purchase requires money, so Nirav modi approaches a bank, say Punjab National Bank (PNB).

PNB says look, I’ll give you a loan but it will be like at 10%.

Nirav modi thinks hard and says, no, that’s too much. Wait, why don’t I take a foreign currency loan instead, after all I’m buying in dollars? Much lower interest rates no? I can get at LIBOR+2% and LIBOR is like 1.5% so I’ll have the money at 3.5%!

But who will give Nirav modi a foreign currency loan? A bank abroad? They don’t know Nirav modi . They don’t have any history of Nirav modi, so why will they give him money?

SO Nirav modi goes to PNB and says, boss, you’re my banker, so please help some foreign bank give me some money to buy diamonds. Say that you will guarantee my loan by giving me a “Letter of Undertaking” (LOU).

PNB now should be saying look, if you want me to give Rs. 100 cr. guarantee, you give me stuff worth 110 cr. at least. As collateral.

But PNB, for some strange reason, doesn’t ask for collateral. More on that later.

So now the foreign bank is ready to lend Nirav modi the money. Because PNB will guarantee it. And the foreign bank trusts PNB. Why does it trust PNB?

Because PNB sends a message on SWIFT – the banking message service – that PNB guarantees Rs. 100 cr. of money for 180 days for Mr. Nirav modi at an interest rate of, say, LIBOR + 2%.  It’s like a message – written in stone, effectively – that says PNB will pay if Nirav modi doesn’t pay.

In fact the foreign bank trusts only PNB. So it gives the money to PNBs account with it, called by PNB as a “Nostro” – the account that PNB maintains with banks abroad, where the other bank will send money meant for PNB customers.

PNB’s nostro account gets the money.

PNB then gives Nirav modi the money from the Nostro account, usually paid off to whoever Nirav modi is buying his diamonds from. This payment is to someone outside India usually, to fund a purchase of diamonds or whatever.

Note this carefully: The other bank gives money to PNB’s Nostro account. Not to Nirav modi. They don’t care about Nirav modi. They only know that PNB has given a guarantee on the SWIFT channel.

Note: the other bank is nowadays mostly the foreign branches of Indian banks. Because the phoren banks have realized something sinister – that PNB’s guarantee is a strange beast that isn’t backed with much, but we’ll come to that

The foreign bank couldn’t care less about whether Nirav modi was buying diamonds or bitcoin – to them, PNB would pay back even if Nirav modi’s bitcoin wallet got stolen.

Why does PNB give a guarantee? Fees. Each year, a bank may charge upto 2% to give the LoU.

So What Happens When It’s Time To Pay Back?

Nirav modi has to get the pearls in India, sell them, receive the money and pay PNB. On the due date written on the LoU.

Then PNB will pay back the foreign bank saying okay, we got the customer’s money so we’re giving it back to you. With interest etc.

That’s what is supposed to happen. But in reality, things went a little berserk, it seems.

The Reality: A Bit of a Ponzi

Nirav modi might not pay back at all. Nirav modi might use the money to speculate in the markets. Or do something else.

What if Nirav modi in the above example simply didn’t have the money to pay back? Instead, he asks a PNB official to open ANOTHER LoU. For the amount owed plus interest. So if we had the first LoU at $10 million the second one is $11 million to cover the interest on the first.

The money from the second LoU is used to repay the first.  It’s just rolling over of credit. Over and over. Standard definition of a ponzi scheme.

This can easily balloon into a larger amount, so large that it’s too much. In effect many such arrangements have turned into semi-ponzi schemes, with one LoU being opened to repay another and so on.

Which is what is likely to have happened.

We don’t know the details, but it looks like:

Nirav Modi took loans from foreign branches of Indian banks through an LoU issued by PNB

This was done through a SWIFT based LoU issued through a rogue employee (or many of them) at PNB

The orders never showed up in the core banking system for monitoring

LoUs were rolled over all the way since 2011, and possibly increased over time too.

The rogue official retired in 2017, and the replacement refused to roll over the LoU which came due in Jan 2018 because he couldn’t find the past transactions in the system

No rollover means a default, since there was no money to pay. So PNB quickly files an FIR saying oh goodness we have lost 280 cr. on the Jan LoUs

Then someone said, “Abeyaar, is there more of these not-in-system LoUs? Someone check no?”

Then someone checked.

Oh gawd. 11,400 crores.

That’s a lot of crores.

Everyone in the bank panicked.

Why couldn’t Nirav Modi just pay it back? He must have the original money no?

Because if it was ever intended to be paid back, the rollovers wouldn’t have been required. At some point, things got so out of hand that rollovers were required in order to stay current.

Typically this would not be a problem. If PNB had done things right, they would have had collateral worth the amount of guarantee, and they would have sold that collateral and paid the foreign bank.

But, and here’s the real issue:  PNB didn’t have any collateral.

Why did PNB give a guarantee without collateral?

If you and I go for a loan to a bank, they’ll ask us for income proof, and collateral. Only small tiny personal loans and credit card loans come backed without collateral. For something of the order of 11,000 cr. you would think they would ask for collateral.

Especially after the scene with Mallya where loans to Kingfisher were given on nearly no collateral (though even there they had a house and some promoter shares pledged)

Why did PNB give this guarantee then? It’s typical – banks give guarantees for more the amount you give as collateral. Because business relationships etc. And then:

Because nearly every bank is doing it.

The loan was not a “fund based limit”. In a fund based limit like a term loan, the bank pays out money. In non-fund-based limits, the bank will only pay if someone else defaults or an event happens – like a Bank Guarantee or an LC or an LoU.

Meaning, PNB assumed that the foreign bank was giving a loan directly to Nirav Modi and that PNB needed to pay only in case Nirav Modi defaulted. So in the eyes of PNB it was always an “non-fund-based” loan.

But this is how a significant part of import financing works. They all rollover credit, and they all use LoUs for much higher than they can offer as collateral.

From my sources, the scale is huge. For every Rs. 100 that a bank has collateral, they will easily provide LOUs for upto 6x the amount. This is a real problem – that most public sector banks do not keep much collateral against non-fund-based limits given to importing customers.

So even if a bank has collateral, it’s nowhere near enough. And then, such unfunded liabilities are not even reported to RBI!

Basel Reporting: No Disclosure

PNB has “unfunded” exposure of 11,000 cr. they say. But they don’t even reveal it in their latest Basel III disclosure:

The funded exposure to “Gems and Jewellery” is shown at 1860 cr.

Unfunded to the same sector: 842 cr.

This doesn’t even add up. So, in effect, PNB didn’t reveal that it was funding massive quantities of “unfunded, contingent exposure”. They will of course pretend that they didn’t know, because the transactions weren’t in the core banking system.

Did Employees Hide it? Was PNB Responsible or was it a fraud?

Can employees be responsible? Could they have hidden the credit and the rolling over of LoUs? But honestly, how does a 11,000 cr. credit pass muster without top management realizing it?

Think of it – your nostro account with these other banks keeps getting big credits that add up to 11,000 cr. Will you not reconcile it in the accounting? The “why is this money even here?” question should have been asked by someone who audits accounts, one thinks?

And the SWIFT messages. It’s a specific kind of message. Why wouldn’t PNB audit the SWIFT trail? Reconcile it with the core banking system? How many more such skeletons will tumble if they do?

Their excuses are

Data wasn’t entered into the core banking system. (Of course, otherwise you would have had to report it)

LOUs weren’t authorized. (Hard to believe, because the amounts are very large. Surely someone on the top would know?)

The SWIFT system was illegally used. (Again, hard to believe that a bank like PNB would not audit its SWIFT messages regularly. Or its auditors. Or RBI.)

On the face of it, it looks like the ex-employee is being used as a scapegoat. It’s likely that a lot of people were in on this thing. And that it generated massive, fat fees for PNB all these years.

Fees wise: Imagine 11,000 cr. worth LoUs being renewed each year – that’s upto Rs. 200 cr. in fees that was all hitting PNB’s top line. You could bribe an employee to maybe give you a small increase – say 10-20 cr. but when you hit numbers like 11,000 cr. this is surely something the top management would know.

What’s the Scale of this scam?

While PNB reported it as a 11,000 cr. scam, they filed an FIR with the CBI for only Rs. 280 cr. This has probably expanded since then but even if the total outstanding is as much as that, there’s a good chance that the actual loss amount will be lesser.

All of it will be borne by PNB right now. Whether someone abused their SWIFT usage is not relevant, if PNB’s SWIFT message said they will pay, they have to pay if there is a default.

But think about the fallout. The problem was that some liabilities were not in the system. There could be more such LoUs. From the same branch or others. Other banks could have such LoUs too. It’s trivial to start looking – and we know that Nirav Modi will not be an isolated case.

Also, the issue was that the limits had no collateral behind them. If all banks are told to verify their non-fund-based limits and demand collateral against them (say at least 25%) then the scale would be absolutely massive. It’s not like this is happening only with Nirav Modi or Choksi. A very large number of importers of commodities have been doing this, and rotating credit. A change in regulation here can change the game dramatically for every other bank (and import account) in the system.

The simple point: this particular transaction will result in a lower loss than 11,000 cr. for PNB. Because of recoveries and such. But if RBI asks all banks to pull up collateral on such lending and stop such practices, the scale is many times larger.

What about the PNB stock?

It’s fallen 17%. But note that it already has 60,000 cr. of gross NPAs. Another 11,000 cr. will hurt it but not kill it. It won’t die – the government will take it over. Shareholders might suffer, but come on as a shareholder of a public sector bank you’re used to suffering.

The problem really is: There is never just one cockroach. When you go deeper, you are likely to find more dirty, dark secrets, and none of them will be any good.

PNB is gonna hurt for a while, but so are others who will find their books similarly tarnished once they investigate.

Will This Bring The Market Down?

Have you been living under a rock? Nothing will ever bring the market down, nowadays.

But the one thing that does bring markets down is the outflow of liquidity. What if so much of the “ponzi” credit – essentially money that was rolled over very month – is being invested directly, or indirectly, into stocks? If RBI tightens up, liquidity will pull money out of stocks, and that will hurt.

Of course, this hurts the fiscal deficit since PNB has to be rescued. So bond yields are up to 7.6% and therefore we’d avoid any long term funds or bonds. Short term it will have to be.

But overall, we wouldn’t worry too much. Just react, don’t predict. What would you do if stocks fell? Better to answer that than to say they will, or they will not.

(And no, not buying PNB)

Our View: Fix it.

This is the Indian public sector banking system. Fix it.

How can you have transactions on SWIFT outside CBS? Fix it.

Why would you not reconcile the nostro accounts? Suspend the auditors. Fire top management. Fix it.

Closing the door behind Nirav Modi, who’s already left the country, is probably useless. If you find fraud,  invoke their personal guarantees, and file cases to attach their personal properties. After that, file in NCLT to make these companies insolvent. Take the hit, and try to recover.

Find out more such instances where collateral cover is too low. Find out if the LoUs or LCs are just getting rolled over or is the customer actually paying back through the Indian current account. And if not, demand more collateral to avoid further spread of the ponzi.

But this is quite unlikely to happen because the banking system is going to take massive hits now, and we’re going to have to deal with the fallout of really horrible systems. It’s amazing that our banks have been this lax, but they have been allowed to; with no bankers being investigated, the rot inside the banks has been ignored and instead, industrialists have been the target of outrage. It’s time to look at banks as malicious players too, and to fix that rot.
#copied*_👆👆Every Indian Should Read & Understand Before Blaming AnyOne....🇮🇳_*

What actually happened in PNB scam? Let’s start from the concept.

First, The Concept

Let’s understand how things work.

Some importer, let’s call him Nirav Modi or AnyBody , wants to import pearls or diamonds and then sell them. The purchase requires money, so Nirav modi approaches a bank, say Punjab National Bank (PNB).

PNB says look, I’ll give you a loan but it will be like at 10%.

Nirav modi thinks hard and says, no, that’s too much. Wait, why don’t I take a foreign currency loan instead, after all I’m buying in dollars? Much lower interest rates no? I can get at LIBOR+2% and LIBOR is like 1.5% so I’ll have the money at 3.5%!

But who will give Nirav modi a foreign currency loan? A bank abroad? They don’t know Nirav modi . They don’t have any history of Nirav modi, so why will they give him money?

SO Nirav modi goes to PNB and says, boss, you’re my banker, so please help some foreign bank give me some money to buy diamonds. Say that you will guarantee my loan by giving me a “Letter of Undertaking” (LOU).

PNB now should be saying look, if you want me to give Rs. 100 cr. guarantee, you give me stuff worth 110 cr. at least. As collateral.

But PNB, for some strange reason, doesn’t ask for collateral. More on that later.

So now the foreign bank is ready to lend Nirav modi the money. Because PNB will guarantee it. And the foreign bank trusts PNB. Why does it trust PNB?

Because PNB sends a message on SWIFT – the banking message service – that PNB guarantees Rs. 100 cr. of money for 180 days for Mr. Nirav modi at an interest rate of, say, LIBOR + 2%.  It’s like a message – written in stone, effectively – that says PNB will pay if Nirav modi doesn’t pay.

In fact the foreign bank trusts only PNB. So it gives the money to PNBs account with it, called by PNB as a “Nostro” – the account that PNB maintains with banks abroad, where the other bank will send money meant for PNB customers.

PNB’s nostro account gets the money.

PNB then gives Nirav modi the money from the Nostro account, usually paid off to whoever Nirav modi is buying his diamonds from. This payment is to someone outside India usually, to fund a purchase of diamonds or whatever.

Note this carefully: The other bank gives money to PNB’s Nostro account. Not to Nirav modi. They don’t care about Nirav modi. They only know that PNB has given a guarantee on the SWIFT channel.

Note: the other bank is nowadays mostly the foreign branches of Indian banks. Because the phoren banks have realized something sinister – that PNB’s guarantee is a strange beast that isn’t backed with much, but we’ll come to that

The foreign bank couldn’t care less about whether Nirav modi was buying diamonds or bitcoin – to them, PNB would pay back even if Nirav modi’s bitcoin wallet got stolen.

Why does PNB give a guarantee? Fees. Each year, a bank may charge upto 2% to give the LoU.

So What Happens When It’s Time To Pay Back?

Nirav modi has to get the pearls in India, sell them, receive the money and pay PNB. On the due date written on the LoU.

Then PNB will pay back the foreign bank saying okay, we got the customer’s money so we’re giving it back to you. With interest etc.

That’s what is supposed to happen. But in reality, things went a little berserk, it seems.

The Reality: A Bit of a Ponzi

Nirav modi might not pay back at all. Nirav modi might use the money to speculate in the markets. Or do something else.

What if Nirav modi in the above example simply didn’t have the money to pay back? Instead, he asks a PNB official to open ANOTHER LoU. For the amount owed plus interest. So if we had the first LoU at $10 million the second one is $11 million to cover the interest on the first.

The money from the second LoU is used to repay the first.  It’s just rolling over of credit. Over and over. Standard definition of a ponzi scheme.

This can easily balloon into a larger amount, so large that it’s too much. In effect many such arrangements have turned into semi-ponzi schemes, with one LoU being opened to repay another and so on.

Which is what is likely to have happened.

We don’t know the details, but it looks like:

Nirav Modi took loans from foreign branches of Indian banks through an LoU issued by PNB

This was done through a SWIFT based LoU issued through a rogue employee (or many of them) at PNB

The orders never showed up in the core banking system for monitoring

LoUs were rolled over all the way since 2011, and possibly increased over time too.

The rogue official retired in 2017, and the replacement refused to roll over the LoU which came due in Jan 2018 because he couldn’t find the past transactions in the system

No rollover means a default, since there was no money to pay. So PNB quickly files an FIR saying oh goodness we have lost 280 cr. on the Jan LoUs

Then someone said, “Abeyaar, is there more of these not-in-system LoUs? Someone check no?”

Then someone checked.

Oh gawd. 11,400 crores.

That’s a lot of crores.

Everyone in the bank panicked.

Why couldn’t Nirav Modi just pay it back? He must have the original money no?

Because if it was ever intended to be paid back, the rollovers wouldn’t have been required. At some point, things got so out of hand that rollovers were required in order to stay current.

Typically this would not be a problem. If PNB had done things right, they would have had collateral worth the amount of guarantee, and they would have sold that collateral and paid the foreign bank.

But, and here’s the real issue:  PNB didn’t have any collateral.

Why did PNB give a guarantee without collateral?

If you and I go for a loan to a bank, they’ll ask us for income proof, and collateral. Only small tiny personal loans and credit card loans come backed without collateral. For something of the order of 11,000 cr. you would think they would ask for collateral.

Especially after the scene with Mallya where loans to Kingfisher were given on nearly no collateral (though even there they had a house and some promoter shares pledged)

Why did PNB give this guarantee then? It’s typical – banks give guarantees for more the amount you give as collateral. Because business relationships etc. And then:

Because nearly every bank is doing it.

The loan was not a “fund based limit”. In a fund based limit like a term loan, the bank pays out money. In non-fund-based limits, the bank will only pay if someone else defaults or an event happens – like a Bank Guarantee or an LC or an LoU.

Meaning, PNB assumed that the foreign bank was giving a loan directly to Nirav Modi and that PNB needed to pay only in case Nirav Modi defaulted. So in the eyes of PNB it was always an “non-fund-based” loan.

But this is how a significant part of import financing works. They all rollover credit, and they all use LoUs for much higher than they can offer as collateral.

From my sources, the scale is huge. For every Rs. 100 that a bank has collateral, they will easily provide LOUs for upto 6x the amount. This is a real problem – that most public sector banks do not keep much collateral against non-fund-based limits given to importing customers.

So even if a bank has collateral, it’s nowhere near enough. And then, such unfunded liabilities are not even reported to RBI!

Basel Reporting: No Disclosure

PNB has “unfunded” exposure of 11,000 cr. they say. But they don’t even reveal it in their latest Basel III disclosure:

The funded exposure to “Gems and Jewellery” is shown at 1860 cr.

Unfunded to the same sector: 842 cr.

This doesn’t even add up. So, in effect, PNB didn’t reveal that it was funding massive quantities of “unfunded, contingent exposure”. They will of course pretend that they didn’t know, because the transactions weren’t in the core banking system.

Did Employees Hide it? Was PNB Responsible or was it a fraud?

Can employees be responsible? Could they have hidden the credit and the rolling over of LoUs? But honestly, how does a 11,000 cr. credit pass muster without top management realizing it?

Think of it – your nostro account with these other banks keeps getting big credits that add up to 11,000 cr. Will you not reconcile it in the accounting? The “why is this money even here?” question should have been asked by someone who audits accounts, one thinks?

And the SWIFT messages. It’s a specific kind of message. Why wouldn’t PNB audit the SWIFT trail? Reconcile it with the core banking system? How many more such skeletons will tumble if they do?

Their excuses are

Data wasn’t entered into the core banking system. (Of course, otherwise you would have had to report it)

LOUs weren’t authorized. (Hard to believe, because the amounts are very large. Surely someone on the top would know?)

The SWIFT system was illegally used. (Again, hard to believe that a bank like PNB would not audit its SWIFT messages regularly. Or its auditors. Or RBI.)

On the face of it, it looks like the ex-employee is being used as a scapegoat. It’s likely that a lot of people were in on this thing. And that it generated massive, fat fees for PNB all these years.

Fees wise: Imagine 11,000 cr. worth LoUs being renewed each year – that’s upto Rs. 200 cr. in fees that was all hitting PNB’s top line. You could bribe an employee to maybe give you a small increase – say 10-20 cr. but when you hit numbers like 11,000 cr. this is surely something the top management would know.

What’s the Scale of this scam?

While PNB reported it as a 11,000 cr. scam, they filed an FIR with the CBI for only Rs. 280 cr. This has probably expanded since then but even if the total outstanding is as much as that, there’s a good chance that the actual loss amount will be lesser.

All of it will be borne by PNB right now. Whether someone abused their SWIFT usage is not relevant, if PNB’s SWIFT message said they will pay, they have to pay if there is a default.

But think about the fallout. The problem was that some liabilities were not in the system. There could be more such LoUs. From the same branch or others. Other banks could have such LoUs too. It’s trivial to start looking – and we know that Nirav Modi will not be an isolated case.

Also, the issue was that the limits had no collateral behind them. If all banks are told to verify their non-fund-based limits and demand collateral against them (say at least 25%) then the scale would be absolutely massive. It’s not like this is happening only with Nirav Modi or Choksi. A very large number of importers of commodities have been doing this, and rotating credit. A change in regulation here can change the game dramatically for every other bank (and import account) in the system.

The simple point: this particular transaction will result in a lower loss than 11,000 cr. for PNB. Because of recoveries and such. But if RBI asks all banks to pull up collateral on such lending and stop such practices, the scale is many times larger.

What about the PNB stock?

It’s fallen 17%. But note that it already has 60,000 cr. of gross NPAs. Another 11,000 cr. will hurt it but not kill it. It won’t die – the government will take it over. Shareholders might suffer, but come on as a shareholder of a public sector bank you’re used to suffering.

The problem really is: There is never just one cockroach. When you go deeper, you are likely to find more dirty, dark secrets, and none of them will be any good.

PNB is gonna hurt for a while, but so are others who will find their books similarly tarnished once they investigate.

Will This Bring The Market Down?

Have you been living under a rock? Nothing will ever bring the market down, nowadays.

But the one thing that does bring markets down is the outflow of liquidity. What if so much of the “ponzi” credit – essentially money that was rolled over very month – is being invested directly, or indirectly, into stocks? If RBI tightens up, liquidity will pull money out of stocks, and that will hurt.

Of course, this hurts the fiscal deficit since PNB has to be rescued. So bond yields are up to 7.6% and therefore we’d avoid any long term funds or bonds. Short term it will have to be.

But overall, we wouldn’t worry too much. Just react, don’t predict. What would you do if stocks fell? Better to answer that than to say they will, or they will not.

(And no, not buying PNB)

Our View: Fix it.

This is the Indian public sector banking system. Fix it.

How can you have transactions on SWIFT outside CBS? Fix it.

Why would you not reconcile the nostro accounts? Suspend the auditors. Fire top management. Fix it.

Closing the door behind Nirav Modi, who’s already left the country, is probably useless. If you find fraud,  invoke their personal guarantees, and file cases to attach their personal properties. After that, file in NCLT to make these companies insolvent. Take the hit, and try to recover.

Find out more such instances where collateral cover is too low. Find out if the LoUs or LCs are just getting rolled over or is the customer actually paying back through the Indian current account. And if not, demand more collateral to avoid further spread of the ponzi.

But this is quite unlikely to happen because the banking system is going to take massive hits now, and we’re going to have to deal with the fallout of really horrible systems. It’s amazing that our banks have been this lax, but they have been allowed to; with no bankers being investigated, the rot inside the banks has been ignored and instead, industrialists have been the target of outrage. It’s time to look at banks as malicious players too, and to fix that rot.
#copied

Excellent Article On PNB Fraud

*The Crisis faced by the Banking Sector*

By: Dr. K. Cherian Varghese

Published:17 Feb 2018, 02:07 pm


Two weeks ago, I asked the Branch Manager of leading private sector bank whether I can get a locker big enough to keep documents like title deeds. The Manager immediately asked an officer to open the safe room and check the availability. The officer after verification answered in the affirmative.

I asked the Manager why the stipulation from time to time that the safe room should be opened only jointly by the Branch Manager and another authorised person was not complied with. The Manager was embarrassed and replied that he had handed over his keys to the officer taking into account the need for quick service. How lightly safety requirements are handled by some banks!

The “four eyes principle” in banks stipulate that two authorised officials are required to put through any transaction. It is heard that in several banks the private computer password given to one official is being passed on unauthorizedly to another. When safety stipulations are not complied with, opportunities are being created for facilitating frauds.

There is an inspection machinery in banks to ensure that no mistakes happen even when the two authorised officials comply with the safety stipulations. There is also concurrent audit at major branches of banks. Apart from all these there is an annual statutory audit of banks. There is also the stipulation to rotate officers at frequent intervals so that no irregularities are continued.

It needs to be examined whether laxity with which responsibilities were handled at different levels had facilitated the fraud of Rs.11,300 crore in Punjab National Bank, the second largest bank in the public sector in India.

4.1. People are anxious to know the type of transaction in which a fraud of this magnitude has happened. There is a system of giving buyer’s credit in banks for those who import goods. As per media reports the following transactions had taken place in PNB.

A branch of PNB in Mumbai had issued Letters of Undertaking (LoU)/ Letters of Comfort to other banks guaranteeing repayment of the buyer’s credit granted by them to the alleged culprits, Nirav Modi and connected institutions. On the guarantee of these LoUs bank branches abroad discounted bills showing sale of diamonds and credited the proceeds to the nostro account of PNG maintained in foreign currency. This money was given by PNB to the alleged fraudsters as buyer’s credit. The stipulation was that money should be repaid to PNB on the due date prescribed. When money was thus received PNB remitted it to the bank branches abroad which discounted the bills. The official of PNB who had been handling transactions in this manner for about seven years retired recently. The new official who replaced him in January,2018 asked the alleged fraudsters to provide securities for issuance of LoUs. When they refused the chain of uninterrupted transactions was broken.

On verification it has come be known that no permission had been obtained from sanctioning authorities to issue LoUs and they were not accounted for in PNB’s records.

6.1. In this context several questions need to be answered. When the LoUs were advised by the PNB branch through the SWIFT messaging system to the bank branches abroad was the stipulation that two officials jointly only can put through the transactions complied with? Why the SWIFT messages were not integrated with PNB’s core banking system? Were the stocks of diamonds stated to have been imported verified and were they in tune with the borrowers’ sales. Why officials had not been rotated periodically as per rules? When the amounts remitted by overseas bank branches after discounting bills into the nostro accounts of PNB were reconciled why the unaccounted LoUs which facilitated the transactions not detected? Did no whistle blower official alert the bank?

6.2. Why the fraud could not be detected in the concurrent audit? Did not the Inspection of machinery also raise any suspicion?

6.3. Could any indication have been obtained through the statutory audit? Could not the overseas bank branches have obtained confirmation for the LoUs from PNB’s higher authorities? How there was wholesale failure of all mechanisms to detect frauds? Are such massive frauds to be detected just by chance? What should be done to avert the lapses?

7.1. Instead of blaming one another efforts have to made for resolution of the issue. Very fast action has to be initiated against those who committed the fraud. There are media reports that efforts in this direction have started. It is reported that Reserve Bank has instructed that PNB should pay as per LoUs to all overseas bank branches. Therefore, the issue may get restricted to PNB.

7.2. It has to be reviewed whether existing stipulations on safety are being complied with in all banks before issuance new instructions running into several pages.

8.1. Trust in banks is to be safeguarded to protect our national interests. Coloured news which may cause apprehensions should not be allowed to spread. Some people are eager to use the fraud as a stick to beat the public sector. The attitude of kicking a person who has fallen should not be allowed to destroy the morale of honest officers in PNB as well as other banks. Unless banks disburse loans in a prudent manner the economy will become stagnant; employment opportunities will not be created.

8.2. We should not forget that the global financial crisis of 2008 was created by large private sector banks abroad.

8.3. The insurance cover for deposits is Rs.1 lakh only in all banks in India, including public sector banks. Notwithstanding this, based on the experience so far it is comforting to note that that the public sector has the backing of the Central Government. PNB has assets to the tune of Rs.7 lakh crore indicating its inner strength.

8.4. The Central Government had recently announced a package of Rs.2.11 lakh crore for recapitalisation of public sector banks.

8.5. Let us hope that at this juncture, the Central Government may defer the Financial Resolution and Deposit Insurance Bill,2017 which envisages bail-in provisions to rehabilitate failing banks by using the depositors’ money.

8.6. Let the provisions of the Bill which carry the message that taxpayers’ money cannot be used time and again to meet the lapses on the part of banks, become instrumental in correcting the lax approach in the banking sector. After the introduction of Goods and Services Tax even ordinary people have become tax payers.

8.7. We should become capable of selecting banks with discernment. This will make the banks and their staff to become more responsible. Let us hope that the officials will carefully observe safety stipulations tvo protect the interest of depositors and make efforts with prudence and promptitude to ensure timely availability of loans. For this, there is no need for a differentiation between banks in the public sector and private sector; all should have their place in the performing sector.

Writer is Former Chairman BIFR, Union Bank of India, Corporation Bank and South Indian Bank.


FOLLOWING is also worth reading which exhibits sympathy for demoralised staff of PNB

Reproduced as received but worth reflecting

On account of PNB fraud media, customers, politicians, general public and sometimes even ministry officials  talk very casually and indulge in lose talk about PSU banks functioning.

Agreed that there are a few dishonest staff (less than 0.01%) which have brought a bad name to the PSU banks. But this cannot be allowed to undermine the silent hardworking and honestly performing 99.99% staff who give their 100% efforts for the improvement of the PSU banking system.

Right now go any PNB branch and you will notice the  staff is totally demoralised and feeling ashamed to face people as if they have committed the fraud.

I do not deny the fact that PSU banking system is going through a rough patch and very bad time due to several reasons many of which are due to external reasons beyond control of the bank.

But people critising the PSU banks cooly forget the heroic efforts taken by 99% of staff which is loyal and honest. PSU banks are the lifeline of Indian economy.

They freed the poor villagers from the clutches of the centuries of oppresive financial wickedness of local sahukaars and mahajans.

They brought within the reach of common man so many luxuries and comforts of life in those days when financial  institutions used to lend only to the rich and wealthy.

Crores of enterprenuers were developed in the nooks and corner of India due to timely and adequate finance and trust of the psu banks.

PSU banks are responsible to a great extent for the rapid industrialisation of our country as well as massive agri revolution.

Poor and needy sections of the society were serviced and continue to be serviced even today mainly by the PSU banks.

Middle class  enjoys luxuries like hifi car, big house, lavish furniture etc due to liberal and affordable loans given by psu banks.

Had PSU banks not been there today, none of  these foreign and private sector banks would have even looked at the poor, lower and middle class sections of society which accounts for nearly 98% of society.

The efforts of these 99.99% unsung heros cannot be simply swayed away by lose talk and baseless arguments.

Late sitting, sacrificing personal life and family time is UNHEARD of in any other sector .

Thursday, February 15, 2018

Effective Action In PNB FRAUD

I Salute to PM Mr Narendra Modi & his entire team that they managed to seize properties worth more than 5000 crore rupees pertaining to borrowers involved in PNB FRAUD worth more than Rs11000 crore rupees  in just one day by conducting series of  raids in many towns where assets of fraud accused Mr. Nirad Modi and others are located.
This is unprecedented action in history of fraud and scam.

Congress Party and Mr. Manmohan Singh on the contrary  allowed all evil doers to be protected during their reign of decades.They promoted flatterers snd bribe earners only during their rule.

But fastest action taken by  present PM Mr  Modi led BJP government will send a deterrent  message to all concerned and such quick action deserve to be appreciated.

Had previous PM Mr Manmohan  Singh been so much sincere and effective as Mr Narendra Modi present PM is, I think there would not have been lakh of crores of rupees of various Banks at RISK. 

At the same time I condemn media men like Rabish of NDTV and politicians like Surjewala of Congress  Party and Kejriwal of Aam Admi  party who are spreading false information, presenting distorted picture of PNB fraud and biased picture of person behind fraud and with mischievous  mind putting all allegation on our best PM Mr Narendra Modi whose swift action in all matters of fraud and misappropriation of money has shaken the confidence of evil doers. God bless Modi and his team.

I am very much confident  that Mr Modi and his government will leave no stone unturned in catching guilty persons and in ensuring appropriate punishment  to them. Bankers will also  learn new culture and stop promoting  flatterers and bribe earners. Bank management will give due importance  to experienced staff and not exploit talented staff as they hitherto did .


News Related to PNB fraud is given below

PNB fraud expands: Rs 3000 crore more from 17 banks, money laundering evidence


PNB fraud case: ED raids 17 premises to seize gold, diamonds worth Rs 5,100 crore



PNB fraud: UPA govt could've avoided Nirav Modi scam in 2013, says ex-Allahabad Bank director who blew whistle against loan.
http://www.firstpost.com/business/pnb-fraud-upa-govt-couldve-avoided-nirav-modi-scam-in-2013-says-ex-allahabad-bank-director-who-blew-whistle-against-loan-4353983.html/amp


Questions On PNB Fraud

PNB management conducted press conference  today 15th Fab 2018 to throw light on reported fraud of Rs11000 crores.

How is it possible that internal auditors of bank, concurrent auditors , statutory auditors and RBI auditors could not detect onhoing fraud?

 How did they certify financial statements  of the frdud ridden branch for 7 years?

 Hundreds of audit might have taken place in branch as well as for bsnk. It gives the indications about nature of auditing.

How CVO and CVC remain silent spectator u him an exposure comes?
Are they meant for post mortem only?


I ask CMD of PNB who is  heading press conference now. Yesterday it was reported that 10 officers have been suspended and today he says only two officers are booked. They have made two juniors scapegoat and none of top officers have been questioned or held responsible .

How is it possible  that junior officers posted in a branch can pay thousands of crores of rupees and that too without entering into finacle i.e. CBS system?

Why was contingent liabilities not reflected in books and not provided adequately? Anf if contingent liabilities are in books of account that how senior officers can claim that there are unaware of fraud?

What are collateral securities and whether security  documents  are properly  executed and are not time barred?


When fraud was detected in third week of January this year,  how could accused borrowers Sri Nirav Modi and others could fly out of India ?

Why bank could not ensure cancellation of passport of all promoters of fraudulent companies as soon as it came to light?

They could have prayed to CBI for advising all airports and for putting ban on promoters leaving India?
They did not learn lesson from Malya episode.

How it is possible that PNB management continue to honour payment under a fake LOU for 7 years without completing due diligence every year?

There is a banking practice and it is mandatory  as per RBI guidelines  that all credit facilities, fund based or non_ fund based must be inspected and renewed periodically.

What you media men are doing?
 Why did you not raise the valid questions?
 Why do you not ask the then CMD and ED of bank and ask questions to Finance Ministers of UPA government and RBI officials?

How is it possible that money amounting  to hundreds and thousands  of crores of rupees are  remitted outside India are not checked by RBI?

Why Finance secretaries of past are not asked questioned?  And so on.

I may say that MD of PNB has not said anything  new in PC. And he has simply made mockery of news of such a high vslue fraud.

Bank officers who are directly or indirectly  associated with entire transactions duting last seven years must be questioned and top officials like CMD , ED and General Managers of last 7 years , retired or working should be hrld accountable  and punishable.
Even a loan account of Rs11000  is renewed every year . How is it possible that  PNB did not carry out due diligence while renewing non_fund credit of Rs11400 crores?

How PNB BANK failed to detect the irregularities at the time of renewal?



FOLLOWING is step taken by government.

Rs 110-bn PNB fraud: Govt asks banks to submit status report by weekend.

Press Trust of India | 14/02/2018

Concerned over fraud of over Rs 113 billion (Rs 11,300 crore) at Punjab National Bank (PNB), the finance ministry has asked all banks to send reports involving this case or other such incidents latest by the end of this week.

Earlier in the day, PNB disclosed some fraudulent transactions with financial implication of $1.77 billion (about Rs 11,334.4 crore).

The bank has detected some fraudulent transactions in one of its branches in Mumbai for the benefit of a few select account holders with their apparent connivance, PNB said in a statement.

Based on these transactions, other banks appear to have advanced money to these customers abroad, it said.

Since more than one lender is involved, all banks have been asked by the Department of Financial Services to submit a status report soon on the fraud, official sources said.

They said the Letter of Undertaking was issued fraudulently by PNB to billionaire diamond merchant Nirav Modi and associates and was encashed overseas by them from different banks, both private and public sector.

All this was being carried out in connivance with officials as high as Deputy General Manager since 2011, sources added.

As a corrective measure, PNB has suspended 10 employees in connection with the fraud.

The finance ministry has asked, through the reform agenda circulated to the banks on January 24, that dubious accounts should be scrutinised and appropriate action against fraudsters be taken with zero tolerance, sources said.

Banks should not dither from taking action against their own employees in case of collusion if there is sufficient ground, they added.

Meanwhile, the bank has also lodged complaint with the CBI against billionaire jewellery designer Nirav Modi and a jewellery company about fraudulent transactions worth Rs 100 billion (Rs 10,000 crore).

The agency received the complaints about the transactions detected by the public sector bank late last night, the sources said.

The allegations are being looked into and future course of action will be decided soon, they said.

Agency sources said Modi is already facing a CBI probe on a complaint from the Punjab National Bank.

This is the second incident in less than 10 days where a bank has been defrauded by the same person.

PNB fraud: UPA govt could've avoided Nirav Modi scam in 2013, says ex-Allahabad Bank director who blew whistle against loan.
http://www.firstpost.com/business/pnb-fraud-upa-govt-couldve-avoided-nirav-modi-scam-in-2013-says-ex-allahabad-bank-director-who-blew-whistle-against-loan-4353983.html/amp

Today on 19th Fab 2018 one excellent  article written by renowned banker Sri Tamil Bandopadhyay is published which enlighten us what could have happen and what did not happen in PNB which  resulted in fraud of more than Rs11000 crore.

Link to livemint

I am submitting it here For the benefit of all concerned and it may help in reaching real culprit.

The anatomy of the PNB fraud

Clearly, the control system in Punjab National Bank, India’s second largest government-owned bank by assets, has gone to the dogs

Just two employees of a bank branch can empty its cash vault. In most public sector bank branches in India, a pair of keys of the strong room is kept with the cash officer and the accountant in the branch; if both collude, they can empty the vault.
To topple a bank, at least three persons need to conspire—the so called maker, checker and verifier or authorizer of SWIFT messages. Banks across the world use SWIFT, or Society for Worldwide Interbank Financial Telecommunications, a messaging network for securely transmitting information and instructions for all financial transactions through a standardized system of codes. The maker keys in the message in the system, the checker checks it and, at the third stage, the verifier transmits it after he is convinced of its genuineness.
Even three persons aren’t enough to topple a bank. This is because after the SWIFT message is sent to an overseas bank for a financial transaction, the bank which receives it and transfers the money (to the overseas Nostro bank account of the exporter or the importer), it sends a SWIFT message back confirming the creation of the loan. The person who receives this message is a different person; not any of the three—maker, checker or verifier. The message comes to a secured room and gets printed on a separate printer; everybody does not have access to this secured room.
If indeed Gokulnath Shetty, a retired deputy manager of Punjab National Bank’s (PNB’s) foreign exchange department at the Brady House in Fort, Mumbai, is the only villain in the $1.77 billion (around Rs11,397 crore today) fraud, then he had played the role of all four—maker, checker, verifier and the receiver of the message confirming the creation of a loan. Clearly, the control system in India’s second largest government-owned bank by assets has gone to the dogs. And, if this is not the case, there must be many more executives at different levels across various departments of PNB who perpetrated the fraud for more than seven years.
Stock market filings

What exactly happened? On 5 February, PNB informed India’s stock exchanges of a Rs280 crore fraud. The bank followed it up on 14 February, informing the stock exchanges once again that it had discovered fraudulent transactions, dating back to 2011, “for the benefit of a few select account holders”. The note did not name designer jeweller Nirav Modi, but media got to know that some of the bank’s employees at a Mumbai branch allegedly issued letters of undertakings, or LoUs, to Modi’s companies, which enabled them to raise money from international branches of other Indian banks in the form of buyer’s credit. The PNB note said “these transactions are contingent in nature and liability arising out of these on the bank shall be decided based on the law and genuineness of underlying transactions.” The money involved is “$1,771.69 million”.
The very next day, in yet another detailed clarification to the stock exchanges, PNB said that when Modi’s employees approached the Mumbai branch on 16 January seeking an LoU, the bank asked for 100% cash margin; but they contested this, claiming the group had been enjoying the facility for years without any cash margin. That led to the discovery of the fraud—issuances of LoUs through SWIFT without any official sanction.
By 25 January, the first devolvement of a set of LoUs occurred, leading to $44.2 million liability for PNB. Subsequently, more LoUs started devolving on PNB. Apart from Modi group firms, the involvement of Gitanjali group firms of Mehul Choksi (Modi’s uncle) surfaced. By 12 February, PNB discovered some Rs11,304.02 crore of unauthorized issuances of LoUs and other trade finance instruments to the Modi firms, Gitanjali group companies and Chandri Paper and Allied Products Pvt. Ltd, owned by Aditya Ishwardas Rasiwasia and Ishwardas Agarwal.
What is an LoU?
What is an LoU? It’s an explicit undertaking offered by a bank to another bank on behalf of its customer, who is importing goods from overseas. Backed by the LoU, the overseas bank gives the so-called buyer’s credit to the importer.
The earlier avatar of LoU was LoC, or a letter of comfort—issued by the importer’s bank for a buyer’s credit (to the extent of the value of the invoice for goods being imported). In the LoC regime, the importer was supposed to pay to the overseas bank and, in case of a default by the importer in paying the debt, the LoC issuing bank would step in. In other words, unlike LoC, LoU is unambiguous on the issuing bank’s responsibility—it’s nothing but a direct exposure of the importer’s bank to the overseas banks which are extending the buyer’s credit.
Buyer’s credit is a short-term credit available to a buyer (importer) from overseas lenders such as banks and other financial institutions for goods being imported. The overseas banks usually lend the importer on the basis of an LoU issued by the importer’s bank. The bank which gives the LoU earns a fee, typically 0.2-0.25% of the amount; the bank which gives the buyer’s credit earns interest (Libor, or London Interbank offered rate, plus a spread, depending on the profile of the customer); and the importer gets a cheap line of foreign credit.
The maturity of an LoU could be between 30 days and one year, depending on the operating cycle of the importer. For instance, a diamond merchant may need two-to-three months’ time to cut, polish and export the raw diamond imported from South Africa, while an entity that imports crude palm oil from Malaysia may need less time for converting it to RBD palm oil through degumming, bleaching and deodourizing. In Reserve Bank of India’s (RBI’s) lexicon, such facilities are short-term external commercial borrowing and they cannot be rolled over. The idea behind having such a scheme is to enable an importer to access low-cost foreign currency funds overseas.
Under RBI guidelines, buyer’s credit for import of platinum, palladium, rhodium and silver and rough, cut and polished diamonds, precious and semi-precious stones should not exceed 90 days from the date of shipment. The list, however, does not include pearls. I am not aware what exactly Modi’s companies were importing. Media reports suggest Modi was importing cultured pearls.
The beginning
How did the fraud happen? Let me try to reconstruct the story from my conversations with bankers, central bankers, foreign exchange dealers and trade finance experts.
Modi wanted to import pearls and diamonds, design exquisite world-class jewellery and sell them. He needed money to buy the pearls and diamonds. He did not want to opt for a rupee loan, and rightly so as it is expensive and there is foreign currency risk. He wanted foreign currency loan. That’s cheap. Besides, he had a natural hedge against currency fluctuations as he was earning in foreign currency by exporting jewellery.
Till now, the story is fine. The twist comes when he decided to take bank loans without having any loan account and other attendant paraphernalia such as sanctioned limits, collaterals, etc. To circumvent all these, he arranged a guarantee from PNB in the form of LoU for cheap short-term foreign currency loans meant for importers. Ideally, the LoU-issuing bank asks for a margin, which could be as much as 100% or even more. Why would an importer offer such a high margin? It would, because this is typically kept with the LoU-issuing bank in the form of a fixed deposit, the return from which is far higher than the cost of the foreign currency loan. Simply put, an importer can arbitrage between high domestic deposit rates and low foreign credit rate. For some reason, PNB, it seems, did not ask for margin. And, this is the beginning of the $1.77 billion fraud that shook the Indian banking system last week.
MT 799
So, one fine morning in 2011, a SWIFT message (code: MT 799) was sent from PNB’s Mumbai branch to some of the Indian banks overseas offering LoUs, committing to pay them the principal plus interest on behalf of Modi companies. Without batting an eyelid, a few Indian banks extended buyer’s credit. We presume the money flowed into PNB’s Nostro account. A bank keeps a Nostro account in foreign currency in another bank overseas for use of foreign exchange and trade transactions.
PNB debited the money by paying to the exporter, the entity which was selling diamonds to Modi. Theoretically, Modi should have sold the polished diamonds and jewellery and paid back PNB on every due date for each LoU, and PNB would have paid back the banks overseas for their buyer’s credit. Had this been the case, there would not have been any fraud. What might have happened (I don’t know for sure at this point) is Modi never paid back PNB! He used the money for other purposes—creating assets overseas or playing in the market or probably buying books from Amazon and enjoying a good life, reading poetry and listening to music.
How could he and others continue this facility for seven years without paying any money? Well, instead of paying his own money, he probably asked PNB (read Gokulnath Shetty) to open another LoU, which could cover the principal plus interest of the previous LoU. Backed by new LoUs, he would get fresh and higher buyer’s credit, which would enable him to clear the previous loans and the chain continued.
Kite flying
In banking parlance, such a practice is called kiting or kite flying. When people use one or more credit cards to withdraw cash at an ATM and pay dues on another credit card, they do the same thing. This way, Modi (and Choksi) may have spawned hundreds of LoUs (investigative agencies peg the figure at 293) and PNB’s liability to the issuers of buyer’s credit ballooned. It’s a sort of ponzi scheme which chit funds run—they continue to pay high interest rates to depositors till the flow of new money continues and once the flow stops, their operations come to a halt. Here, too, Modi kept on opening LoUs to repay old facilities; the game came to a sudden halt when Shetty’s successor at PNB’s Fort branch refused to open a new LoU without a margin.
Of course, at this point, this is a conjecture. If this has not happened, we need to believe that Modi was doing good business till January this year when he had no money to pay back PNB.
Shetty, who had been at PNB’s foreign exchange department in Mumbai since 31 March 2010, and a few of his colleagues were using SWIFT messages for the LoUs and none else in the bank seemed to be aware of this. This is because such transactions never showed up in the core banking system of the bank. When Shetty retired in 2017 and his successor refused to entertain Modi without any margin, Modi claimed that he had all along been enjoying the facility. However, the gentleman could not trace the past transactions in the system, and the cat came out of the bag.
There would not have been any problem if PNB had securities or other collaterals to back its LoUs as the bank would have sold the securities /collaterals and paid the banks overseas. This has not happened because Modi never enjoyed any credit facility. He probably just had a current account with the bank, and Shetty and company were entertaining him.
Removing paper trail
The question is how Shetty could remain undetected so long. Most, including PNB, say he removed the paper trail of messages. The unauthorized messages could not be detected as the SWIFT system in PNB is not integrated with its core banking solution or CBS—a software for recording transactions, storing customer information, calculating interest and completing the process of passing entries in a single database. In fact, this is the case with most public sector banks in India which roughly have 70% market share of assets. As the system is stand-alone, no confirmation from the CBS or any other system that originates the transaction is received.
Before SWIFT, Telex was the only means of message confirmation for global funds transfer. It was hampered by low speed and security concerns. Telex senders had to describe every transaction in sentences which were then interpreted and executed by the receiver. This led to many human errors. SWIFT system was formed in 1974 when seven major international banks formed a cooperative society to operate a global network to transfer financial messages in a secure and timely manner. For any cross-border financial transaction, SWIFT is the only secured messaging platform available and acceptable to all banks worldwide.
Those who understand banking technology well, including a former deputy governor of RBI, say integrating SWIFT with CBS is no big deal. Of course, it has a cost but that’s definitely smaller than a $1.77 billion fraud. In fact, some of the Indian private banks have already integrated their CBS with SWIFT. Over the weekend, I checked with Yes Bank Ltd, Axis Bank Ltd, HDFC Bank Ltd and ICICI Bank Ltd and in all four, SWIFT is an integral part of CBS. In State Bank of India, too, the system is integrated. Many Indian banks also run centralized trade finance centres. Integration of SWIFT with CBS will mitigate risks to a large extent even though it may not eliminate risks entirely.
Key questions
It will take a while for the dust to settle on this case, but we need to look for answers to a few questions without losing time:
## How long will most public sector banks refuse to integrate SWIFT with their CBS? Considering the vulnerability of a stand-alone SWIFT, we should be happy that there aren’t too many frauds happening in trade finance.
## Indian banks overseas offered buyer’s credit by remitting funds through inter-bank transfer in the Nostro account of PNB. How could PNB’s CBS not catch such fund transfers?
## As a standard banking practice, Nostro reconciliation for each entry (credit and debit) is done by the treasury back office of a bank with mirror entry in CBS. Why were funds pertaining to the buyer’s credit loan routed through PNB’s Nostro account not reconciled for seven years? The SWIFT entries might have been generated without the knowledge of the senior management, but how could the fund entries—payments of principal and interest for seven years—in the Nostro account in PNB remain undetected?
## Overseas lenders sent loan confirmation to PNB via authenticated SWIFT, post disbursement of buyer’s credit. On receipt of such notification from overseas lenders, why was reconciliation not done with CBS to cross-check the loan details and book the actual liability for principal and interest?
## Modi continued to pay PNB till January 2018 and the lenders had received these funds from PNB. What was the basis of such repayments for PNB if buyer’s credit did not exist in their CBS? How were these Nostro entries reconciled?
## Finally, RBI is very particular in keeping a tab on all transactions in banks’ Nostro accounts and it always insists on timely reconciliation of such accounts. How could the rapid rise in transactions in PNB’s Nostro account escape the regulator’s eye?
I understand RBI sent a note to all banks in the first week of February, asking them to reconcile all Nostro accounts.
Can a deputy manager alone create a $1.77 billion potential hole in a large bank’s balance sheet? For PNB, it has been a multi-layered failure, accompanied by complicity of its executives at different levels.
Concurrent auditors in bank branches are assigned the job of transaction verification. There could be delay, but I wonder how the concurrent auditors failed in tracing out the full chain. Ditto about the statutory auditors. They are supposed to check customer-wise transaction register, along with sanctions /approvals for authenticating the true state of the books of accounts and establish the amount of bank’s contingent liabilities on the date of book closure. Similarly, the internal auditors are expected to verify client files, outstanding transactions, approvals and transaction registers. Besides, RBI auditors conduct the annual financial review.
For the record, PNB’s Shetty will always be compared with R. Sitaraman, a small-time officer in State Bank of India’s treasury department in Mumbai who handheld Harshad Mehta into the coffers of India’s largest lender leading to the Rs4,999 crore 1992 stock market scam.
Post script
The PNB episode will probably provoke the Indian banking system to take a close look at funding the bullion sector, not known for transparency. Many firms, I am told, take cheap buyer’s credit and use the money to earn interest keeping it overseas in the form of deposits with banks. Many a time, the quality of import and the genuineness of the bills are questionable. Most importantly, there’s often an incestuous relationship between the importers and the exporters—they come from the same stable. This could potentially lead to money laundering.
The Indian banking system’s exposure to the gems and jewellery segment was to the tune of Rs69,000 crore in December 2017, less than 1% of the Rs82 trillion total bank credit.
Tamal Bandyopadhyay, consulting editor at Mint, is adviser to Bandhan Bank. His latest book, From Lehman to Demonetization: A Decade of Disruptions, Reforms and Misadventures has recently been released.
His Twitter handle is @tamalbandyo.
Comments are welcome at bankerstrust@livemint.com


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