In order to understand Punjab National Bank scam first, we need to know what are these terms LoU, SWIFT and CBS in the banking system.
LoU – Letter of Undertaking is issued for overseas import payments which involve an issuing bank (Brady House branch of PNB in Mumbai), a receiving bank (Hong Kong branches of Allahabad Bank and Axis Bank), an importer and a beneficiary entity overseas. When banks issue LoUs for a client (Nirav Modi in this case), they agree to repay the principal and interest on the client’s loan unconditionally. Few PNB officials allegedly used SWIFT messaging system (basically used for the overseas transaction) and verified guarantees on LoUs without taking necessary permission. As a result, overseas branches of many Indian banks gave foreign exchange credit.
SWIFT – Society for Worldwide Interbank Financial Telecommunication (SWIFT) assigns each financial organization a unique code. So when LoU is issued, the message of credit transfer is conveyed to overseas banks through SWIFT code. Behind most international money and security transfers, SWIFT system is used. It usually has three security layers – a maker, a checker and a verifier within the core banking system before it is issued.
CBS – Core Banking System refers to a centralized system established by a bank which allows its customers to conduct their business irrespective of the bank’s branch.So, it removes the resistance of geo-specific transactions. The transactions are updated on the real-time basis. If the transactions were done through CBS, the fraud would have been detected lot earlier.
The scam was started in 2011 and was detected on 16th January this year, after which the PNB officials reported it to the concerned agencies. One fraud LoU was issued on January 16, 2018, for Nirav Modi’s firms. The bank officials asked the Modi’s firms to submit 100% cash margin for the LoU, to which the firms replied that they had used the similar facility in the past, so when PNB did there internal inquiry whole story came to limelight and they found that fake LoUs were issued. Nirav Modi had cheated the bank for Rs 11,360 crore approx and had left the country on 1st January much before the fraud was detected. PNB has suspended 10 of its officials involved in this case.
Politics has already started with both the leading political parties playing the blame game.
— Congress (@INCIndia) February 15, 2018
If this person had fled India before the FIR on Jan 31, then he is here, photographed at Davos with PM, a week before the FIR, after having escaped from India? Modi govt must clarify. #NiravModi #PublicMoneyLoot pic.twitter.com/gQQnKQNjDo
— Sitaram Yechury (@SitaramYechury) February 15, 2018
Look what happened at Punjab National Bank ? A scam of more than Rs 11,000 crore. People's savings are not safe. There must be a thorough, time bound enquiry
— Mamata Banerjee (@MamataOfficial) February 15, 2018
— Sagarika Ghose (@sagarikaghose) February 15, 2018
If the PNB figure of 11000 crore is correct then #NiravModi scam is bigger than Vijay Mallya's. And if media reports are to be believed and he left India a week before the PNB FIR was filed then Govt. has plenty to answer.
— Sumanth Raman (@sumanthraman) February 15, 2018