The Great Indian Bank Robbery

From the good old days of elections of ‘NaMo’ being elected, we have transitioned to witness the ‘NiMo’ fiasco. Recently, Nirav Modi pulled off  ‘the great indian bank robbery’. The Punjab National Bank discovered a fraud worth Rs 11,400 crores triggered by a red flag raised by one of the employees of Gitanjali Gems Inc.

In this blog, I am going to touch upon on the following broad topics:

  • Terminologies (LoUs)
  • How the actual process should have been
  • What aspects of the process were missing
  • Security & audit compromises
  • My take on the liability pending

What’s a LoU (Letter of Undertaking) ?

Let’s say you are a customer of an Indian bank and you require a short-term credit in a foreign country to import something. You can approach the foreign exchange department of your bank and ask for a LoU. In return, the bank would ask you for a collateral or a guarantee, which could be in the form of fixed deposits or other assets. This could even be 100% or even more of the credit sought, depending on your relationship with the bank. If your bank is convinced, it will issue an LoU, which when given to an overseas branch of another Indian bank would result in release of the amount in foreign currency. This amount does not come in to your account directly; it goes to a specific bank account of your banker back home. It is called Nostro account. You can then decide in whose favour the payment needs to be done.

How does the actual process happen?

Here’s the flow diagram of how the customer & bank interact and make the transaction successfully. Steps 1 to 10 will explain how the customer approaches the overseas and seller and the banks come into picture.


What aspects of the process were missing?

  • Step 4 – PNB never asked for any collateral to be provided before initiating the LoUs. To further explain, to provide a 12000 crore of credit, PNB did not ask for any fixed deposits or land or any form of guarantee which provides a comfort to open up the line of credit
  • The immediate approving credit offer failed to check/report the breach of insufficient collateral in multiple ways

Security & audit compromises:

  • SWIFT (LoU issuing system) is not integrated with CBS (Core Banking system). Core banking system is basically an interface via which each and every transaction should be ideally passing. However, SWIFT was not integrated and such transactions were missed.
  • Each employee of the bank is required to be transferred after 3 years as per RBI norms, whereas the two junior officials were not transferred for 5 good years
  • Internal & external auditors failing to capture the non-compliance
  • Process to track if the payment was made to the intended sellers was not confirmed or checked
  • LoUs or bank guarantees are not supposed to extended for more than 90 days (for diamond industry) as per the RBI guidelines. In this case, the credit was provided for 1 years which was way higher than the guidelines

My take on the contingent liabilities:

Gitanjali Gems (Nirav Modi) was a registered customer primarily for PNB. However, in order to cater their customer, PNB sought LoUs from other banks. Nevertheless, since the it was PNB’s customer, it would be PNB’s liability to make good of the payable of the other associated banks. 

On a broader note, despite if the liability is shared or borne by PNB completely, the event has added significantly in the write-offs of the balance sheets of the banks and will in turn affect the bottom line (profit) adversely. The event has come in times when the banking sector is under immense profit margin stress.

Thank you 🙂

Diverse views are welcome!


Published by

Akshay Baregar

A hardcore analyst who loves to read about finance, upcoming concepts, ​and their applicability. Have always wanted to become an analyst and been thinking like one from the recent past. This is my attempt to write and make the world around me aware of the financial happenings and the likely impacts/ effects on the Indian/Global Economy. My favourite topics are monetary policies, fiscal reforms, market movements, predictions, wealth management etc . Hoping for an excellent response and feedback from the readers.

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