Punjab National Bank (PNB) – Nirav Modi Scam

Importers generally take loans from foreign Banks based on (Letter of understanding) that a
bank provides. Since foreign banks don’t know Indian Corporates credit worthiness they
depend on a Bank guarantee from Indian Bank and in this case the Bank guarantee (LOU)
provided by PNB. 
 
Nirav Modi used the LOU from PNB and took a loan from foreign back to an extent of 100
Crores to start with for 90 days. He used this to purchase Diamonds and precious stones for
his business and deployed the money earned into other business instead of repaying the loan.
At the end of 90 days he went back to PNB asking for an additional LOU for 200 crores and
took another loan, he used this money to repay the original loan of 100 crores with interest
and utilized the rest of the amount on his business. At the end of the next 90 day period he
took an other loan for a bigger amount and this went on until he had accumulated loans
through LOU from PNB worth 11,000 crore. This was accomplished with Nexus from the
bank managers and officials of PNB bank branch who circumvented the checks and
balances within a Bank related to international trade finance division from a Risk
Management perspective, which will trigger Early Warning Alert as and when
suspicions transactions arise. This has been a very bad governance issue on the part of
PNB. The official in PNB who facilitated the scam retired in 2017and the new officer refused
to roll over the LOU which came due in Jan 2018 because he couldn’t find the past
transactions in the system.  There, on one LOU being opened to repay another and so on
has spiralled quickly into an unmanageable debt for Nirav Modi who eventually
defaulted and fled the country. In addition to credit roll over, PNB did not take adequate
collateral security from Nirav while extending the LOU which added to the issues.