Jaipur: Punjab National Bank (PNB), India’s second largest public sector bank informed SEBI that it has been hit by defalcation, amounting to 11,500 crore at one of its branches in Mumbai, and the heart of this fraud is billionaire jeweller, Nirav Modi. This case dates back to 2011 when Letters of Undertaking (LoU) were issued by a Mumbai branch of PNB. Letter of Undertaking (LoU) is issued by banks and it acts as a guarantee for any money lenders to the borrowers and can only be issued if the borrower deposits the same amount with the bank after proper approval of the credit committee.
5 Letters of Undertaking were issued by PNB bank and loans were sanctioned in foreign branches of Axis Bank and Allahabad Bank on the basis of these Letters of Undertaking. In this case, employees in question, issued these letters without a proper and appropriate approval. LoUs were issued because Nirav Modi had to make some payments to his suppliers and buyer credits were needed to make these payments.
Three firms, Diamonds R US, Solar Exports and Stellar Diamonds are in question in regards to this fraud. In this case, due diligence was not followed for whatever vested interests of the accused. In regards to this case, PNB in its official statement said, “These transactions took place for the benefit of few select account holders with their apparent connivance and based on these transactions, other banks appear to have advanced money to customers abroad.” Subsequently, PNB has suspended it’s 10 employees, and referred the case to CBI and ED.
Several Indian banks with overseas branches will be impacted as they have provided loans based on these LoUs. PNB is denying liability, claiming that these are fraudulent LoUs. This has also led to massive hit in trade market as it has caused downfall to the PNB stock price. These 11,500 crores are almost equal to 1/3rd of PNB’s market capitalisation.