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And the News was flashed on 14 February 2018, that Punjab National Bank (PNB), the second largest government-owned lender, has uncovered around Rs. 11,400 crore frauds among its branches in Mumbai.

Let us understand what is the fraud all about?

An importer, who imports any product, is compulsorily required to issue the Letter of Undertaking, through its bank in India to banks in the foreign country. This Letter of Undertaking will provide a guarantee to the lender bank in the foreign country that in case the importer will not repay the loan then the bank who issues Letter of Undertaking will have to pay the loan.

In the instant case, two employees of PNB have issued unauthorized Letter of Undertaking, essentially bank guarantees to foreign branches, on behalf of Mr. Nirav Modi and Gitanjali group.

The Letter of Undertaking states 'Lend money to Nirav Modi's company, so Mr. Nirav Modi can pay their import obligations. If they don't pay, then we will make good this payment'.

In the normal course of business, the letter of the undertaking is issued on the basis of collateral, which may be some property, fixed deposit with the bank or anything else. The Bank who issue Letter of Undertaking has to enter these transactions to SWIFT messaging system (Society for Worldwide Interbank Financial Telecommunication).

Now, what happens is the transaction of issuing Letter of Undertaking is reported to SWIFT messaging system but the same has not been enter into Core Banking System of Bank and also PNB issued the Letter of Undertaking in absence of any collateral.

Since the transaction has been enter into SWIFT the foreign bank-issued payment to the exporter.

According to CBI FIR, in many transactions, the money raised through these guarantees was used to settle an older loan taken effect through a previous bank guarantee.

Thus the amount piled up to Rs. 11,400 crore.

What Will Happen Now?

PNB is left holding guarantees worth Rs. 11,400 crore which it has to pay to State bank of India, Allahabad Bank, Axis Bank, Union Bank and other banks. These payments are overdue for next few months.

The PNB bank has tried to shift some of the blame to these banks. In a caution notice to the chief of these banks, it essentially said that you have to be more due diligence before giving loans.

Didn't they notice that these guarantees are for one year, while Reserve Bank of India allows 90 days for the diamond industry?

For instance, the enforcement directorate has claimed it has already recovered gold, precious stone and diamond worth around Rs. 5,500 crores. It remains to be seen, how much amount can be recovered.

The author can also be reached at ca.raunakgarg@gmail.com


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