Banks play an important role in the economic development of the financial sector of India. They are running a business that involves all the transactions done by every person. As banks are running a business, sometimes they earn and sometimes they lose. The very common cause of banks losing money is the inability to collect the money-back which was distributed as and if they have a concentration of loans in a particular business segment that falls in hard times, those losses are even more severe.
In 2018, Punjab National Bank, one of India’s largest public-sector banks experienced a fraud of INR 11,400 crores at its Brady House branch located in Mumbai. The accused person was Mr Nirav Modi, a well-renowned diamond maker of India. Here's the complete story of how the PNB scam was unfolded.
Who is Nirav Modi?
Nirav Modi is an Indian fugitive businessman; he is the founder of Firestar Diamond International and his uncle Mehul Choksi is the chairman of Gitanjali Group. These two companies were involved in the Diamond business and had a retail chain of 4000+ stores in India.
Nirav was brought up in Belgium and did his early schooling at the Wharton School at the University of Pennsylvania. He came back to Mumbai and started with his family business of jewellery manufacturing.
Nirav Modi's Business of Luxury Diamond
In 1999, he founded Firestar. After working for years and getting experience in the business Nirav in 2008 launched a diamond store bearing his name in New Delhi. Seeing and attracting a huge crowd he thought of opening more stores and started the 2nd store in Mumbai followed by 17 more stores. Nirav launched his stores globally with stores in New York and Hong Kong city.
According to news, his company had a presence in 12 countries with 30 boutiques in 2018. Firestar is the only diamond manufacturing company in India to source the coveted Argyle pink diamonds, found only in Western Australia.
At this time Nirav was also looking to expand its product line with more affordable pieces. He became a lot popular after designing his "Golconda Lotus Necklace" with an old, 12-carat, pear-shaped diamond as a centerpiece in the year 2010. The diamond had previously been sold in the 1960s and had to be repolished.
Stores were running very well and were recognized as a theme of pure luxury, many Indian celebrities were doing the advertisement for Nirav Modi’s jewellery. Nirav Modi was also featured in the Forbes list of Indian Billionaires in 2013. To run such a vast and huge business globally he was always in the need of funds which he took from small public sector banks.
How did Nirav Modi Avail Loans from Banks?
At first, he started with a small number of loans which he was able to repay the bank within the time limit. The first fraud started in 2010 when Nirav took the loan with the help of a fake letter of undertaking issued by PNB bank at its Brady House branch. Letter of Undertaking is said to be a sort of guarantee that is issued by a banking entity to the concerned party for attaining short-term credit from the overseas branch of an Indian bank.
How Nirav Modi Operated the PNB Scam?
Nirav thought of this as an easy way to obtain short-term credit. He then started giving fake Lou's to the bank and used to obtain a lump sum amount of money. Nirav managed to get 1,212 more such guarantees in the next 6-7 years.
The Letters of Understanding were signed in favour of Indian bank branches for the one-year import of pearls, with the Reserve Bank of India's guidelines allowing for a total of 90 days from the date of shipping. The guideline mentioned in the letters were ignored by overseas branches of Indian banks. They disregarded providing any documents or information with PNB that had been made accessible to them by the companies when they applied for loans.
When PNB approached banks to provide a 100% cash margin, the bank argued they had availed this facility in the past as well. The transactions were never registered in the bank's main system, leaving PNB management in the dark for years. This suspected there could be a fraud that led to them digging further into the transaction history.
Later it was found out that PNB employees were also involved in this process of providing fraud loans. They got the commission from Nirav and used to do the job for him. PNB employees used the SWIFT network to send messages to Allahabad Bank and Axis Bank regarding financial requirements.
At that time they found that these letters were on a fraud basis and the money was transferred to Dummy accounts of firms that were inactive in business and were acting according to the command of Nirav Modi. A total of INR 6,400 crore acquired through PNB Lou's was transferred abroad to buy real estate and personal property through "dummy corporations."
All these methods were used by him to transfer the money received by these banks for business purposes and were spent on his personal use and luxury. He escaped India in January 2018 after which a warrant was issued by the CBI and Enforcement Directorate to arrest him.
The PNB scam is said to be one of the biggest fraud cases in India’s banking history to date. Till now the Government authorities of India have sealed and auctioned several thousand crores worth of properties and assets of Modi. Yet the government has not been able to get money recovered in full.
There is a need for improvement in our Indian Banking Sector and mainly a focus on providing the loans and credit facilities to the people who need them the most and who can repay without making defaults.
How did Nirav Modi get loans?
Nirav took the loan with the help of a fake letter of understanding issued by PNB bank.
How much money did Nirav Modi borrow from the bank?
Nirav Modi and his uncle Mehul Choksi defrauded the bank of over Rs 14,000 crore.
In which year did Nirav Modi take the loan?
Nirav Modi took the first loan from PNB on March 10, 2011, and later managed to get 1,212 more such guarantees over the next 74 months.