How the 11,400 Cr. Import Ponzi Scam at PNB Unfolded

Metadata

• Author: Deepak Shenoy
• Full Title: How the 11,400 Cr. Import Ponzi Scam at PNB Unfolded
• Category:articles
• URL: https://www.capitalmind.in/2018/02/pnb-scam-nirav-modi/

Highlights

• The bank may have to take a loss, but the government has a stated policy that no public sector bank will fail (View Highlight)
• LIBOR (View Highlight)
  • Note: LIBOR (acronym): London Interbank Offered Rate; an interest rate at which major global banks lend to one another. 📈💹
• • 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 (View Highlight)
  • Note: LoU is given by asking for a collateral. But Nirav Modi was given the LoU without any collateral. When it was time to pay the first loan, another LoU was issued in order to pay the previous loan
• 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. (View Highlight)
• PNB didn’t have any collateral. (View Highlight)
• banks give guarantees for more the amount you give as collateral. Because business relationships etc. And then: Because nearly every bank is doing it. (View Highlight)
• 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 (View Highlight)
• 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. (View Highlight)
  • Note: This is a common practice
• 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 (View Highlight)