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THE PUNJAB NATIONAL BANK (PNB) SCAM CASE STUDY

Article · September 2021

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 THE PUNJAB NATIONAL BANK (PNB) SCAM CASE STUDY

BY

Sagarika Mohanty (PhD. Scholar, KIIT University)

Sheela Agarwal (PhD Scholar, KIIT University)

INTRODUCTION:

Punjab National Bank (PNB) is a public sector bank in India and it is also Nationalized bank. It has wide
coverage in all over the world. But in this case Bandy House PNB, Mumbai Branch is famous one, where
scam was executed. The PNB scam is one of the biggest Indian banking scams ever. This scam also popularly
known as The Nirav Modi scam. This case is narrated and concluded on the context of research misconduct.

CASE ANALYSIS:

In the year 2017, it was found that PNB was involved in a huge scam of around 11,000 Cr Rupees by issuing
false bank guarantee in an unethical manner to a business tycoon Mr. Nirav Modi. He is a man dealing with
the business of diamonds along with his uncle Mehul Choksi. In order to import diamonds from foreign
countries, he approached PNB for the buyer’s credit. Against the buyer’s credit as per the RBI guidelines the
banks should ask for collateral securities. But in this case two employees of PNB manipulated the data and
without taking any collateral securities issued the LOU which is the Letter of Undertaking issued by the Indian
bank which is used by the importer to import goods from the foreign countries by getting a loan from the
Indian banks present in the foreign countries. It implies if in case the importer fails to repay the loan amount
to the foreign bank, then the Indian bank who has issued the LOU will be held responsible for the payment.
In this case the loans were taken in 8 different ways during the period of six years starting from the year 2011
to 2017. The foreign banks involved in this case are actually Indian overseas banks such as Allahabad bank
and Axis Bank.

As per the banking system any transactions between Indian and foreign banks is done through SWIFT system.
Whenever any bank issues LOU it gets automatically recorded in CBS (Core Banking System). But in case of
PNB the SWIFT system was not directly linked with the CBS. These things were generally done manually in
the brady house, Mumbai branch. Both the PNB employees took the advantage of the scenario and issued false
LOU copies to the overseas bank. This was smoothly continuing until in January 2018 when the companies
of Nirav Modi again approached the PNB for buyer’s credit. The officer in charge asked for the collateral
security against the buyer’s credit. The company refused to give any collateral security and thus disclosed that
they have been taking the credit since past 6 years without any collateral security. When the officer after
listening to the fact underwent for thorough verification found no records for the issuance of buyer’s credit to
Nirav Modi’s company. Now this became a matter on great concern for the PNB and they handed over the
case to CBI. Finally, a case was lodged against Nirav Modi, His wife, his brother and his paternal uncle as
they were the directors of the companies. This is a case of serious misconduct.
CONCLUSION:

This is a clear case of Falsification/Fabrication as the records were manipulated by the employees of the
PNB and false LOU was issued by them to the foreign banks. Apart from this even the banking system of
PNB was not that strong because of which the employees were able to manipulate the things. If the SWIFT
system would have been linked with the CBS, then definitely the records of issuance of LOU could be easily
found and it won’t be possible on their end to do the transactions 8 times in a due course of 6 years. Hence, it
is learnt from this case that upgradation of the banking system of PNB is highly required and all the employees
should abide the laws of the organization they are associated with.

References:

1. https://www.researchgate.net/publication/340403325_An_Analysis_of_Financial
_Fraud_through_PNB_Bank_Scam_and_its_technical_Implications
2. Investopedia, “Punjab National Bank Scam’’
3. Wikipedia , “Punjab National Bank Scam’’

4,Times of India, Business ,https://timesofindia.indiatimes.com/business/india-

business/punjab-national-bank-fraud-case-key-points/articleshow/62920705.cms

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