Unethical Issues in Finance

Hello everyone!! I am Prajwal Sahota and I am glad to share my views on the Unethical Practices happening in Finance.

So before digging up the PNB Scam, let me give a brief desciption about the PNB .

PUNJAB NATIONAL BANK :

Punjab National Bank (PNB) is a Banking and Financial service bank owned by Government of India. Its headquarter is in New Delhi, India. The bank was founded in 1894. As of June 2019, the bank had over 115 million customers, 7,036 branches and 8,906 ATMs.

PNB has a banking subsidiary in the UK (PNB International Bank, with seven branches in the UK), as well as branches in Hong Kong, Kowloon, Dubai, and Kabul. It has representative offices in Almaty (Kazakhstan), Dubai (United Arab Emirates), Shanghai (China), Oslo (Norway), and Sydney (Australia). In Bhutan it owns 51% of Druk PNB Bank, which has five branches. In Nepal PNB owns 20% of Everest Bank Limited, which has 50 branches. Lastly, PNB owns 84% of JSC (SB) PNB Bank in Kazakhstan, which has four branches.

Listings and shareholding

PNB's equity shares are listed on Bombay Stock Exchange and the National Stock Exchange of India. It is a constituent of the CNX Nifty at the NSE.

Shareholders (as on 31-Dec-2013)	Shareholding
Promoter Group (Govt. of India)	58.87%
Foreign Institutional Investors (FII)	17.51%
Insurance Companies	15.46%
Individual shareholders	04.05%
Banks/Financial Institutions/Mutual Funds/UTI	03.02%
Others	01.09%
Total	100.0%

THE SCAM :

The Punjab National Bank Fraud Case relates to fraudulent letter of undertaking worth ₹11,356.84 crore (US$ 1.4 billion) issued by the Punjab National Bank at its Brady House branch in Fort, Mumbai; making Punjab National Bank liable for the amount.The fraud was allegedly organized by jeweller and designer Nirav Modi. Nirav, his wife Ami Modi, brother Nishal Modi and uncle Mehul Choksi, all partners of the firms, M/s Diamond R US, M/s Solar Exports and M/s Stellar Diamonds; along with PNB officials and employees, and directors of Nirav Modi and Mehul Choksi's firms have all been named in a chargesheet by the CBI. Nirav Modi and his family absconded in early 2018, days before the news of the scam broke in India.

The bank initially said that two of its employees at the branch were involved in the scam, as the bank's core banking system was bypassed when the corrupt employees issued LOUs to overseas branches of other Indian banks, including Allahabad Bank, Axis Bank, and Union Bank of India, using the international financial communication system, SWIFT. The transactions were noticed by a new employee of the bank.

MY ANALYSIS:

So basically PNB filed a case against Nirav Modi, his brother Neeshal and his uncle Mehul Choksi. PNB initially reported a Scam of Rs. 280 crores but it was later realised to be Rs.11,400 crore. So you guys must be thinking that this is a lot of money and does one can get away with a scam of such magnitude?Possibly one of the biggest in India's banking history? Let me Break it down for you;

              

                                        Nirav Modi

                             As we all know that Nirav Modi is an importer of diamonds and importers prefer to take loans in Foreign Currencies as interest rates on that are lower. what Modi then had to do was to approach PNB and ask for Buyer's Credit- essentially a loan that is taken from an overseas bank and guaranteed by PNB. In order to do this PNB had to issue a "Letter of Undertaking"(LoU) to an overseas bank. A LoU basically guarantees an overseas bank that if it lends money for a specified period to a client identified by the home bank(in this case PNB) them the home bank will assure that the money will be returned to the overseas bank.

                Note that the assurance is directly between the overseas bank and home bank, so the overseas bank gave loan directly to PNB not Nirav Modi. So you must be wondering that How This Happens?

                Basically an account is created by PNB called a 'NOSTRO' account to which the overseas bank lends the loan. So the money which Modi got was not used for imports but for other uses maybe even money laundering. 

                So a new Lou could have been issued each year since 2012 to cover the old ones sort of like a PONZI SCHEME.Now the question arises that How PNB issued so many Lous? They are generally given when the home bank has an approved line of credit for the client. 

HOW SCAM SHOULD HAVE BEEN STOPPED:

1. PNB should have verified Nirav Modi's credit-worthiness or the other way to establish liability would have been to ask Modi to present equal or more collateral. PNB did nether.So PNB is not clearly victim as it claimed to be. Infact senior bank offilcials were also involved in this scam.
2. PNB's external and internal Auditors should have been more careful as they were not able to find out the scam at this huge magnitude.
3. The overseas bank overlooked the Nostro accounts. This should not have been done.
4. RBI could have stopped it by enforcing stricter lending norms.
5. The Primer Minister's office didn't acted on a letter sent by a whistleblower in 2016 with extensive details about the activities.This was a huge mistake.

So at last I would like to conclude by saying that all these kind of scams affects our economy as well as the taxpayers because the loan needs to be paid back to the overseas bank and for that Government funds are used which comes for Taxpayers money.

SCAMS MUST BE STOPPED TO THE EXTENT WE CAN!!

THANK YOU EVERYONE FOR READING MY BLOG...

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