PNB fraud: How money vanished from one account

NEW DELHI: In one of the biggest fraud cases to hit Indian banking, Punjab National Bank (PNB) informed stock exchanges on Wednesday that it has been hit by embezzlement amounting to Rs 11,300 crore at one of its branches in Mumbai. The enforcement directorate (ED) has registered a money laundering case against diamond merchant Nirav Modi and his relatives along with others and raided over dozen premises across the country connected to them on Thursday.

Here is how the fraud took place:


WHEN AND WHERE DID THE FRAUD START?

In 2011, when a letter of undertaking (LoU) was opened at the Fountain branch of PNB in Mumbai by the alleged fraudster.

Read also: Billionaire jeweller under lens as PNB jolted by Rs 11,300 crore fraud

WHAT'S AN LoU?

A bank guarantee. The bank opening an LoU for a client agrees to unconditionally repay the principal and interest on client’s loan. The client could be an importer who uses funds or credit limit with an Indian bank to get cheaper foreign currency loans.

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HOW WAS THE LoU MISUSED?

A PNB deputy manager, Gokulnath Shetty, allegedly used his access to the SWIFT messaging system used by banks for overseas transactions to authenticate guarantees given on LoUs without any sanctions. Based on such authentications, overseas branches of several Indian banks gave forex credit.

Read also: Nirav Modi under ED lens in CBI's Rs 280cr fraud case

ARE OTHER BANKS AFFECTED?

Several Indian banks with overseas branches will be impacted as they have provided loans based on these LoUs. PNB is denying liability, claiming that these are fraudulent LoU.

WHAT ACTIONS HAS PNB TAKEN?

It has suspended 10 employees, and referred the case to CBI and ED.

HOW AND WHEN DID IT COME TO LIGHT?

In January, when the earlier LoUs matured and foreign branches did not get their money. They then turned to PNB, which said that the guarantees were fraudulent.

THE FRAUD...IN NUMBERS

1) The fraud is 8 times the bank’s 2016-17 profit of Rs 1,325 crore

2) It is equal to a third of PNB’s market cap of Rs 35,300 crore

3) PNB share price fell 10 per cent on Wednesday. It cracked a further 8 per cent in Thursday's morning trade

4) Government was expected to infuse Rs 5,473 crore in PNB equity