Saturday 24 February 2018

Understanding the PNB Scam- Illustrative Network Map

The PNB Scam is the HOT topic of this month ! The news of the scam and subsequent events of Mr. Nirav Modi leaving India- have shown their devastating effects on Stock Market. PNB's Stock Price plummeted to Rs.113 from RS.161 in last two weeks ! The topic has started heated debates regarding Indian PSU Banks, their operations and over all regulatory framework. 

But the complexity of the events and connections, involved in this financial crime, is too overwhelming to conclude about it- on the basis of media debates. A bird's eye view revealing the over all scenario regarding this Scam requires reading diverse kind of information. After, reading around dozens of articles regarding the scam across the media outlets and portals. I have tried to summarise and illustrate the whole scenario for my readers. 

First of all we will discover brief gist of informative articles (with link to each of them) and factual sub-points regarding the broad main points related to the PNB Scam. Then we will have a look at a Network Map created by me, to facilitate better understanding of the complex set of happenings and relationships between various parties involved. So, here we go -

1. Who's Nirav Modi ?  

2. Who's Mehul Choksi ?
3. What exactly PNB advanced, in terms of credit, to Mr. Modi ?
  • It's an LoU- Letter of Undertaking -LoUs are used by a bank’s customer to avail short-term credit in a foreign country. These transactions are not retail in nature and are mostly used by businesses for import of goods. - The overseas bank lending to the borrower based on the LoU earns interest on the amount, the bank issuing the LoU gets a fee and the borrower gets a credit facility at a place where she may not have banking relationships. Moreover, interest rates in India are higher compared to international benchmark rates. So the effective outgo on interest for the borrower is also beneficial. If the collateral is in the form of a fixed deposit, there is further gain on the interest earned, while the bank also gets some funds to use.
  • It's communicated through SWIFT- SWIFT, short for Society for Worldwide Interbank Financial Telecommunications, and letters of undertaking are the two instruments allegedly manipulated by PNB employees to let diamond merchant Nirav Modi channel the money illegally. - https://scroll.in/article/869394/understanding-swift-the-messaging-system-at-the-heart-of-the-1-8-billion-pnb-fraud
  • It was allegedly Unauthorised - In PNB’s case, LoUs were issued via SWIFT in favour of Nirav Modi. An LoU is a bank guarantee from PNB (or any other bank) on the basis of which the overseas banks grant loans. The PNB employees reportedly shared the SWIFT password with Modi’s aide, allowing fraudulent authorisation of transactions. - https://qz.com/1210341/the-1-8-billion-punjab-national-bank-nirav-modi-scam-is-throwing-up-more-questions-than-answers/
4. How the Fraud developed over time ?
  • In 2011, ​i​t began with a a much smaller amount with a single letter of undertaking (LoU)​ worth around Rs800 crore.- When the borrower did not repay the first Rs800 crore, the bank ought to have stepped in and booked a default by the group company. Instead, the two PNB employees, who were allegedly party to the fraud, issued more LoUs on behalf of PNB, asking other banks to give out fresh loans to the firms. This continued until two weeks before the whole operation came to light after some of Modi’s employees visited the bank on Jan. 05. The management was caught napping and the overdue loans exceeded Rs11,000 crore.When the credit due was not paid in time, more LoUs were issued on behalf of PNB to offset the payment​. - https://qz.com/1208266/the-1-8-billion-punjab-national-bank-nirav-modi-fraud-explained/
5. What are the Actions taken by Modi Govt ?
6. The Auditors under Scanner-
7. Alleged UPA-Chidambaram Connection - 

And here is the resultant network-map explaining the scam and resultant events to provide a bird's eye view and facilitate understanding of the various connections involved in the scenario-
Understanding the PNB Scam- Illustrative Network Map
Created by Makarand Desai with Mindmup.com
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