In yet another shocker to the country, Punjab National Bank has revealed that the quantum of the fraud it reported a couple of weeks ago could increase to Rs 12,700 crore, up from Rs 11,400 crore.

"In continuation to our filing with Stock Exchanges on 14.02.2018, we have to inform that quantum of reported unauthorized transactions can increase by USD 204.25 million (approx)," PNB said in a late night filing to the stock exchanges.

On February 14, the bank had reported unauthorised transactions worth USD 1.77 billion (approximately Rs 11,400 crore) after it had detected some fraudulent transactions in its Brady House, Mumbai branch.

The lender said that fradulent Letters of Undertaking (LOUs) were issued in an apparent connivance of PNB officials to favour diamond and jewellery businessmen Nirav Modi's and his uncle Mehul Choksi's group companies.

Based on these LOUs, other banks including State Bank of India, Axis Bank, Canara Bank and Allahabad Bank, among others, gave loans to the two group firms.

So far, the total dues, including the direct loans given by consortium of lenders previously, to both groups is estimated to be over Rs 21,000 crore.

The Enforcement Directorate (ED) and Central Bureau of Investigation (CBI) are already investigating the matter, while Modi and Choksi are said to have fled from the country to avoid being interrogated.

It also rules in wilful negligence and a collapse of risk mitigation across the banking system. For a start, it seems several norms were flouted in crafting allegedly unlawful letters of undertaking (LoU) to the tune of thousands of crores for jeweller Nirav Modi. 

These letters were then accepted by several other banks who never crossverified anything, even accidentally, for years. Worse, the LoUs, by PNB’s own admission, flagrantly violated RBI’s limit of 90 days of credit by recasting that to a year. Yet, not a single overseas lending bank noticed this. There were 30 of them.
An LoU is a bank guarantee, a sort of gold promise the bank issues to customers, which they can use to get money from overseas banks. It’s something that should be accounted for somewhere, even if it is a non-funded item.
Strangely, it seems that the mandatory concurrent audit that matches transactions never picked up any irregularities, even though the money Modi borrowed should have reflected in PNB’s nostro account.
Which then brings us to the auditors of PNB, internal and external.
Is it possible that a branch that holds accounts for a list billionaire’s firm escapes close scrutiny? Modi was a Forbes rich-lister. By all means, the branch in question must have been doing enough high-value transactions for it to be in the spotlight. Not a single external auditor, four at any given point in time, found anything amiss while reconciling transactions and undertakings
It is also not clear if the branch was inspected by RBI, which ideally would have been drawn to accounts maintained by businesses of a certain risk category. In this particular case, the central bank, auditors and the senior-most management of PNB already had a giant red flag flapping in their face.
Afew years ago, PNB, along with a clutch of other banks, was had by Winsome Diamond Group, another jewellery firm that defaulted on letters of credit (LoCs) to the tune of Rs 6,800 crore. It turns out PNB had the largest exposure at Rs 1,800 crore.
Given all this, it would call for a very rich imagination to assume that PNB never tightened its internal controls and mechanism of guarantees and undertakings, especially to the jeweller community. And that no one — from public sector officials, the vigilance officer, to the bank regulator or even the board of directors — focused on tightening up the criteria for issuing LoCs or LoUs.
Finally, all those who believe that the fraud was pulled off by just two employees must ask what sort of business intelligence technology our banks use. In banking, all transactions are now reflected in real time and captured on a dashboard available to multiple gatekeepers. Besides, the transaction and bookkeeping software should be sophisticated enough to pick up irregular data that the human eye might miss.
PNB’s repeated misadventures must be seen as a failure not just of risk management processes, but also of the banking regulator’s role. The larger series of systemic failures, from Vijay Mallya’s well-chronicled default of loans, to that of Winsome Group, spotlights the indifference of the custodians of public money.
The Nirav Modi episode, including his undetected departure from India like several other alleged fraudsters before him, also sends out a damning message to a billion Indians. This message, a line from Oliver Goldsmith’s The Vicar of Wakefield, cuts across political parties: laws govern the poor, and the rich govern the law.