Nirav Modi hails from a business family of diamond merchants. He grew up in Belgium and established the brand “Nirav Modi” in 2010. A few days ago, Mr. Nirav Modi became popular as the internet got flooded with the news about the PNB scam. This is one of the biggest scams in the banking industry. After all, $ 1.7 billion (11,300 crore rupees) have been looted, this is ₹ 1,13,00,00,00,000. Yes, this much money he took as loans from the banks without any guarantee! Various news articles outlined how Mr. Modi discovered the drawbacks of the banking system and used LoUs as his weapon. Let us tell you about LoUs
An LoU is a Letter of Undertaking which is a guarantee issued by banks for overseas import payments. Nirav Modi brand has been using this mode of payment since its inception and has been obtaining LoUs from PNB’s Brady Roach branch, Mumbai. These guarantees which are issued by bank helped Mr. Modi to raise the short-term loans from foreign branches of Indian banks to pay to its suppliers.
This article is an attempt to explain the scam in as simple terms as possible. Let us understand this scam in 4 simple points.
1. LoUs and its conditions
LoUs are guarantees issued by the bank for overseas payments. Under this, a customer can get LoUs issued in the name of the foreign branches of the other banks. For example, if you have an account in some ABC bank, you can ask a bank to issue a letter of undertaking (LoU) in the name of any foreign branch of XYZ bank. But, at the same time, the issuer/customer of LoU is required to pay margin money to the bank who is issuing the letter of undertaking. And, on the basis of the margin paid by the customer, the customer will be granted a credit limit.
But, in case of Nirav Modi, neither did he pay any margin to the bank nor was he granted any limit to the credit.
2. No Official Record of LoUs
Nirav Modi, an owner of 3 firms, i.e., Diamond R Us, Solar Exports and Stellar Diamonds, governed the payments for its suppliers through the illegal mode of LoUs. He issued the LoUs in the name of Axis and Allahabad Bank which were issued by PNB. Moreover, no official records of such letters were found. Now, this questions the loyalty of those 18 PNB employees who have been fired yesterday because of LoUs scam.
Of course, they would have got their own share in this wrongdoing. Or do we even care what’s right or wrong anymore?
3. Now, PNB is duty bound to repay the loans…let see how
Technically, Nirav Modi and his ventures are required to repay the short-term loans as the LoUs were demanded by Nirav Modi and his companies. Since, the borrower failed to make the payment, the bank (Punjab National Bank) in this case, is needed to pay the amount which is 11,300 crore INR. To top it all, Reserve Bank of India has purportedly asked PNB to pay back the banks (Axis and Allahabad Bank) that gave loans to his firm as per letter of undertaking furnished by the Punjab National Bank as these two banks have settled Nirav Modi’s suppliers’ amount.
Bravo! Now, who paid to the diamond-man’s suppliers, the bank which has something to do with the business but nothing to do with the suppliers. That’s how these businessmen play with the loopholes of the government, eh?
4. How PNB got to know?
In general, we say that this universe will pay you back for your immorality and all your wrongdoing. Same happened with Mr. Nirav Modi, when he requested PNB to issue more LoUs for paying the overseas suppliers. This time bank refused to do so and asked Mr. Nirav to keep 100% collateral for the same, but then he told the bank that no such money was kept as margin in previous cases. This “no margin earlier” forced PNB to check the history of the scanned records of LoUs. And, that’s how Mr. Nirav Modi’s humongous scam came to light. Not only this, the bank has announced the one other culprit of this scam. Mehul Choksi who is the managing director of Geetanjali Gems.
No doubt, this raises a question towards banking system of India. But, at the same time, we should not forget that it’s the people who break the rules. It’s us who sometimes take the advantage of the drawbacks and the loopholes that are prevailing in our systems. It’s us who are morally bankrupt and unable to fear our fate.
“Sunil Mehta, the CEO of PNB says that the “bank will fix all the problems”. But I hope that the CBI finds Mr. Modi at earliest as, as per sources, he has left the country in the beginning of this year and PNB filed the case against him on 29th Jan”