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  • Writer's pictureLAWGIC STRATUM


Author: Vidisha Raman


Transparency in reporting’ is a major value integrated into the fundamentals of Ethical Banking which response to emerging approaches to a sustainable economy. The mega scam in Punjab National Bank posed a threat to the sustainability of all banks when it disclosed the violation in its fundamental norm by billionaire diamantine, Nirav Modi in connivance with some bank officials. This scam came into the limelight on February 14, 2018, when PNB lodged an FIR with CBI stating that fraudulent LoUs worth Rs 280.7 crore, which further ballooned to over Rs 14,000 crore, were issued and registered a complaint with ED, naming three diamond firms, Diamonds R Us, Solar Exports, and Stellar Diamonds. The country’s second-largest public sector bank said that the bank’s core banking system was bypassed to raise payments notes to overseas branches of other banks using the international communication system.

The Story Line:

Questions were raised about how they unfolded the scam. The two of the accused bankers used fake Letters of Undertakings (LoUs) at PNB's Brady House branch in Fort, Mumbai, without mentioning any details in the PNB records. At that time the LoUs were opened in favor of Indian banks for one year, restricted under the guidelines of the Reserve Bank of India.

Nirav Modi, with the assistance of senior PNB officials, colluded with the bank by obtaining LOUs without submitting any securities. These LOUs were then submitted via Society for Worldwide Interbank Financial Telecommunications (SWIFT) messages to banks in other countries with the purpose of settling the older loan. These all transactions using SWIFT passwords were never recorded in the bank’s core system.

The perpetrators got caught when after seven years of unauthorized sending of LoUs, one of the two employees got retired and Nirav Modi’s firm asked for a fresh set of guarantees from a new PNB employee. In that position, the successor asked for collateral security to which the firm contested that they have been availing this facility in the past also. But the records failed to reveal the details of facilities triggering the investigation and finding of fake LoUs.


The resulting aftermath left PNB holding bank guarantees worth over Rs 11,400 crore which it had to pay to a multitude of different parties including the State Bank of India, Allahabad Bank, and Union Bank. It started deploying as many employees as to pursue recovery from various defaulters to return to profitability. Furthermore, on the stock market, NIFTY and SENSEX lost their confidence in investing and doubted the transparency of the business in the country. Big questions arose concerning the credibility of public sector banks as a whole, and also whether regulators like the RBI and SEBI were performing their duties to the required standard.

In particular, banks like UCO Bank, Allahabad Bank, Axis Bank, Union Bank of India, and SBI directly shared the impact as they had offered credit based on the LoUs that had been issued at the behest of PNB. This deadly blow penetrated its impact on another state-owned entity i.e. Life Insurance Corporation. LIC, which is the single largest institutional investor in all these four entities, lost nearly Rs 1,400 crore over the last three trading sessions on its investments.

Jewelry Sectors like Gitanjali Gems shares plunged up to 19 percent post-Punjab National Bank’s declaration of fraud, other jewelry stocks also witnessed a similar fate.

Response and Result:

In response to all this, the Union Government signaled a zero-tolerance approach to white-collar crime, approving a new law targeting economic offenders fleeing the country, by introducing the Fugitive Economic Offenders Act (2018) which empowered Courts to confiscate all assets and properties of the offenders who are charged with default over Rs 100 crores and those who try to evade the charges by wilfully remaining outside the jurisdiction of the Indian judiciary.

The Reserve Bank of India immediately banned banks from issuing guarantees in the form of letters of undertaking (LOU) to prevent any further misuse of the medium. Using its coercive powers, it discontinued issuing LoUs for trade-related credits for imports in India by commercial banks with immediate effect. The RBI also directed banks to connect their core banking systems (CBS) to the SWIFT. ED raided across 17 locations and confiscated property worth Rs 5,100 crores. Nirav Modi having charges of criminal conspiracy, cheating, dishonesty, fraud, breach of trust, and breach of contract was arrested in London after CBI asked Interpol to issue a Red Corner Notice against the billionaire.


There has been RBI advisory on almost all kinds of possible banks but fraud like this has thrown light on the requirement of strict governance principles and practices of public sector banks. The need of an hour is to adopt more formal means to deal with the violation of mandatory guidelines. Like clearly RBI had directed the banks to connect their core banking system to SWIFT but this information depended on second hand and no other legal instrument was introduced to enforce this. And in a more individual level, banks should review their audit reports regularly at their branch level and reports should be shared with government auditors followed by an examination by RBI. Correcting this anomaly would prevent most of the banking frauds and would help in analyzing potential risks in the future.


Edited by A. Gemma Maria Suzzana, Associate Editor, Lawgic Stratum.

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