The way I see it…(A big bank fraud)

With the latest Rs. 11,000 crore scam by a world-renowned jeweler Nirav Modi and his firms, several questions arise in our minds. This is a willful scam carried out by few bank officials and the jeweler. Having said that the involvement of top politicians and RBI officials cannot be ruled out.

Janhavi Phadnis Bapat

With the latest Rs. 11,000 crore scam by a world-renowned jeweler Nirav Modi and his firms, several questions arise in our minds. This is a willful scam carried out by few bank officials and the jeweler. Having said that the involvement of top politicians and RBI officials cannot be ruled out.

Here is my modest attempt to look at the nature of the fraud, people involved in the fraud, questions on the banking system and the solution:

Nature of the Fraud:

Buyer credit is a short term credit available to an importer (buyer) from overseas lenders such as banks and other financial institution for goods they are importing. The overseas banks usually lend the importer (buyer) based on the letter of comfort (a bank guarantee) issued by the importer’s bank. For this service the importer’s bank or buyer’s credit consultant charges a fee called an arrangement fee.

This is a very common practice for importers in India and worldwide. In a crystal-clear transaction, a Company (Nirav Modi in our case) approaches its bank (PNB – India) who has credit lines on the company for the buyer’s credit. The facility is granted by the bank after a thorough checking of invoices raised by the suppliers or the agreements etc. Generally, such lines are collaterised or secured by the bankers depending on their risk appetite. After the transaction is checked, the importers bank (PNB India) will issue a letter of comfort to the overseas bank (i.e. Banks outside India.. Say Axis Bank Hongkong branch). The issuance of letter of comforts happen over a uniform communication system called SWIFT (Society for Worldwide Interbank Financial Telecommunication). The SWIFT transactions are referenced with unique Identification numbers and can be traced by the banks. These are the standardized templates for various transactions used by banks. After receipt of the letter of comfort, the overseas banks will deposit the amount in overseas account of the company (say, Nostro account of PNB). This is the loan amount. The Company will pay its suppliers using this money. Generally, this facility is available for 90-120 days and can be rolled over to 6 months or 1 year depending on case to case basis. At the maturity of the loan, the Company will send the principal + interest to its banks NOSTRO account and from there the money will be repaid to the lending overseas. Incase of default by the Company, the ultimate liability is on the importers bank (PNB India in this case).

In the current case, naturally the transaction did not take place in the above manner. As it appears, Nirav Modi approached PNB Mumbai branch for buyers credit without any sanctioned credit limits. The invoices based on which the buyers credit is sought, may (or may not) be fake. The bankers did not take sufficient collateral. Moreover, the SWIFT messages sent by PNB to overseas banks are exceeding the amount of invoices. That means some fake letter of comforts were issued and accordingly the lending enjoyed by the jeweler was much more than the legitimate amount and he defaulted to repay. The question arises on how the bankers rolled over the facility for a longer tenure.. Definitely the bankers were at fault.. but is our banking system so poor that such a big scam went un-noticed?

The System:

RBI has certainly laid some guidelines and regulations about buyers credit in its Circular of External Commercial Borrowing and Trade Credit giving information. The banking system has few checks and balances to avoid scams. For example:

  • Import bills and documents should be received from the banker of the supplier by the banker of the importer in India. AD Category – I bank should not, therefore, make remittances where import bills have been received directly by the importers from the overseas supplier. However there are few exceptions. As a sector specific measure, banks are permitted to allow remittance for imports up to USD 300,000 where the importer of rough diamonds, rough precious and semi-precious stones have received the import bills / documents directly from the overseas supplier and the documentary evidence for import is submitted by the importer at the time of remittance. Banks may undertake such transactions subject to few conditions.
  • Import Documentation (Evidence of import) has been mandated. The onus is on the banks.

Looks like, the relaxations granted by RBI have been misused. Apart from the RBI regulations, there are other checks too, Like:

  • Regular reconciliation of SWIFT Messages.
  • Verification / reconciliations of Nostro Accounts
  • Robust documentation requirements and audits
  • Statutory Audits etc
  • Other compliances and Risk Management requirements at bank as well as corporate level.

It is quite unlikely that such transactions went unnoticed for so many years. I am not surprised at the news of cautioning of RBI or auditors. The involvement of influential people must be the key. The fraud has been managed quite well and Finally we are duped!

A Chinese Solution?

What is the solution to this? Starting from Harshad Mehta to Vijay Mallya and now Nirav Modi, the frauds are continuing. Apart from these multi-million frauds, there are several mid sized and small debtors defaulting on the loans. The regulations are getting strict. But the frauds are going on… This reminds me of a news last year, where China has taken another strict step towards penalising the debtors and defaulters. In an unprecedented crackdown, China’s Supreme People’s Court has blacklisted 6.73 million bank defaulters and restricted them from travelling by plane, applying for loans & credit cards or getting promoted. Should India too go that way? Maybe…

The stricter norms will definitely reduce the occurrences of such frauds. But, in my opinion, the mindset of Jugadu Indian where “everything can be managed” needs a big change!! The integrity of owners, employees, bankers as well as politicians need an uplift!.. a big one.. until then, the frauds will go on my friend!!


1. https://www.rbi.org.in/scripts/bs_viewmascirculardetails.aspx?id=8101

2. http://www.financialexpress.com/world-news/china-launches-crackdown-against-7-mn-bank-defaulters-shows-india-how-to-deal-with-debtors/558021/

Categories: Fema / RBI

View Comments (10)

  • From your Article I understand the concept of NASTRO , SWIFT and mode of LOU issuance and financial implications in that.

  • No way board of directors is responsible?
    Is it possible to handle such a big scam by dy Manager only?

  • Sir , Jab AGM , DGM other Top most officials corrupt ho to businessman ko aasani se loan mel jata hi . that too without any collateral . Either u can be honest or rich . Both at same time is never be easy . Bus Beurocrates ki salary double karke election jitte raho , aache din aa janyenge . 2-4 din me janta sab bhul jayage . yeh hindustan hi janab . Mugal , Angrej , hum tum sab ek hi kam me lage hi .


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