February 15 turned out to be a doomsday for banking sector in India and especially for the country’s second largest state owned PSU, Punjab National Bank (PNB) as Central Bureau of Investigation (CBI) and Enforcement Directorate (ED) exposed an alleged fraudulent episode with lending of over 11,000 crore to flamboyant jewelry merchant Nirav Modi, including his flagship firm Firestar International limited. Further speculations revealed that 17 banks lent about Rs. 3000 crore to various firms of Nirav Modi and his maternal uncle Méhul Choksi which include Central Bank Of India (Rs.194 crore),Dena Bank(Rs. 153.25 crore),Vijaya Bank (Rs.150.15 crore),Bank of India (Rs.127 crore),Syndicate Bank (Rs. 125 crore),Oriental Bank of Commerce (Rs.120 crore),Union Bank Of India (Rs.110 crore),IDBI and Allahabad Bank (Rs.100 crore each).

What is the Nirav Modi Episode?

The Nirav Modi Episode started in 2011 when an amount worth Rs.800 crore was lend by the PNB with a single Letter of Undertaking (LOU) which is a guarantee that a bank is obliged to repay the loan if the actual borrower fails to do so.However, in order to obtain the LOU, the borrower has to pay margin money to the bank issuing the LOU, based on which a credit limit is granted to him.

Surprisingly, in the Nirav Modi’s episode, with the help of some PNB employees, the company managed to obtain the LOU without having sanctioned the margin money or the credit limit, reported Reuters. By showing the LOU obtained from PNB, Nirav Modi, managed to obtain further loans from banks including Axis Bank and Allahabad Bank which he used to pay to his suppliers of rough stones which were used to create the jewelry.

How was the fraud unleashed?

The fraudulent episode was unleashed when Nirav Modi’s firm requested further LOUs from PNB for paying its suppliers. The bank officials refused to provide the LOUs until the firm kept 100% collateral. The firm argued that no collateral or money was kept in the past, after which, the bank officials checked their records only to find that indeed no such transaction had taken place, meaning that the guarantees issued from the bank were issued by defying the rules.

What happened after the fraud was realized?

PNB filed a criminal complaint with the CBI on January 29 accusing Nirav Modi, Mehul Choski and others for defrauding the bank leading to a loss of Rs. 280 crore ($43.8 million). The CBI and ED have confiscated all properties Nirav Modi and Méhul Choksi in Mumbai and Delhi and a FIR has been registered against them by CBI under IPC sections related to criminal conspiracy, cheating and provisions of the Prevention of Corruption Act.

Amid speculations and flurry of reports, both CBI and ED have begun the process of tracing and getting Nirav Modi back to India, while CBI issed Interpol Diffusion Notice to various countries to trace Modi and ED has moved to Ministry of External Affairs for cancellation of his passport.

The Nirav Modi Episode has led to unprecedented questions on the current government and its functioning along with the credibility of the Indian Banking Sector. Government Agencies are deciphering the episode in detail to uncover the details of one of the biggest frauds in Indian Banking history.

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