Punjab National Bank: Profile
Punjab National Bank (PNB) is India’s first Swadeshi Bank which started its operations on April 12, 1895 from Lahore. The bank had an authorized capital of Rs. 200,000 and working capital of Rs. 20,000. PNB started the business with the spirit of nationalism where it stood as the first bank purely managed by Indian Capital.
The bank’s brand image and the trust posed by its customers is clearly leading the customer base and overall business of the bank. The recent amalgamation of Oriental Bank of Commerce(OBC) and United Bank of India (UBI) has strengthened the business and customer base.
| Particulars | FY’019 (Rs. In crore) | FY’020 (Rs. In crore) |
| Total Business | Rs. 11,34,279 | Rs. 11,75,674 |
| Total Investment | Rs.202,128 | Rs. 240,466 |
| Net Profit (Loss) | Rs. (9975) | Rs. 336 |
| C-D Ratio | 67.79% | 67.04% |
| Net NPAs | 6.56% | 5.78% |
Punjab National Bank: Problem
Central Bureau of Investigation(CBI) and Reserve Bank of India (RBI) on 14th Feb, 2018 suspected the operation of Punjab National Bank. These institutions doubted when the bank showed the exceptional transaction of approximate value of $1.77 billion. This led to series of supervision and reporting from other financial institutions. RBI strictly undertook 11 of the 21 listed banks under overseeing due to the irregularities in capital, asset and loans. The whole stock market scrambled due to PNB fraudulent transaction.
Punjab National Bank: The Scam
PNB scam is also called Nirav Modi Scam. Nirav Modi and Mehul Choksi, along with the PNB officials were responsible for this Rs. 11,300 crore fraud. PNB officials Gokulnath Shetty and Manoj Kharat directed fraudulent loan to Nirav Modi and entities tied to him using Letter of Understanding (LOU).
LOU is a form of bank guarantee where the issuer of LOU (PNB Bank) guarantees to pay on the behalf of client (Nirav Modi) to other banks operating in foreign land. For LOU, other banks operating in foreign land, transfer the fund to client for international transaction crediting the NOSTRO account of PNB bank.
Letter of Understanding (LOU) has three characteristics i.e.
- It is a short term credit
- LOU has a sanctioned credit limit.
- Issuer bank enjoys certain margin money for raising LOU from customer.
LOU issued by PNB officials to Nirav Modi didn’t have a sanctioned credit limit nor Nirav Modi paid any margin for to PNB Bank. This allowed Nirav Modi to easily sanction money from PNB Bank for their international transaction. Mr. Gokulnath Shetty and Manoj Kharat provided 203 of unauthorized LOUs to Nirav Modi in seven long years.
The scam was revealed when one the PNB officials who managed LOUs for Nirav Modi retired. The official appointed in position of the retired employee asked collateral(guarantee) from Nirav Modi’s associate who approached bank for LOUs. Nirav Modi’s associates were unware of such requirements which signaled something wrong in the process. This incident was reported to PNB management and PNB reported the case to CBI and RBI. In seven years, PNB has sanctioned Rs. 11,300 crore rupees to Nirav Modi and entities associated to him.
The Scam and Nirav Modi
Nirav Modi clearly benefitted from the loopholes of Indian banking system. He understood the gap in the LOUs system, partnered with PNB officials and took advantages of the fund and flew away before the scam was made public. Nirav Modi borrowed Rs. 11,300 crore from PNB bank without any collateral and loan account.
Nirav Modi used all this borrowings for jewelry and other businesses. The main problem was that Nirav used the funds from PNB for his businesses and the earnings from business was reinvested i.e. less focus was given towards settling the funds. There were payment of old LOUs and issuance of new LOUs but not according to bank’s standard procedure. Nirav Modi and associates continued this for almost 7 years eventually making the fraud worth Rs. 11,300 crore.
The Scam and the Banking officials
Mr. Gopalnath Shetty and Mr. Manoj Kharat are two officials found guilty for Nirav Modi scam. Mr. Gopalnath Shetty was working at foreign exchange department of PNB Mumbai branch. Mr. Shetty along with his colleague issued 293 unauthorized to Nirav Modi and associates.
The scam was the result of loopholes in operation. The involved officials of PNB used the unauthorized procedure of issuing LOUs for their own benefit. Again, the transfers were done using SWIFT system which was not linked to the Core Banking System (CBS) i.e. the SWIFT transfer bypassed the CBS. During the scam, Reserve Bank of India didn’t make SWIFT system, an integral part of banking core system.
Unauthorized sanction of funds continued for 7 years which clearly doubts the accountability of auditor and higher level management. Every year, a huge amount of funds was transacted unchecked. The big question arises upon the role of internal and external auditor. It is the prime responsibility of auditors, both external and internal, to trace and question such transaction with contingent liability figure. Credit Department, Audit Department and responsible department heads failed to summon such blunder in the system, for seven years.
The overseas participatory banks for LOUs i.e. Hongkong branch of Axis Bank and Allahabad Bank didn’t anticipated this as they were getting low risk transactions assured by PNB Bank in India.
The Scam and Impact of the scam
The immediate and major impact of this scam was seen in stock markets. NIFTY and SENSEX, the stock exchanges in India are majorly influenced by banking sector. A banking fraud like Nirav Modi Scam which worth Rs. 11,300 crore will surely affect such stock exchanges.
After the revelation of this scam, investors lost confidence in banking securities hence in stock market. Investors started having doubts regarding the transparency of business operation. The overall perception of investors towards all financial sector of the country changed. Out of 39 banks listed, 34 bank’s share price fell after the scam. Five banks that were directly exposed to credit risk were;
| S. No. | Affected Banks | Exposure in INR crores |
| 1 | Union Bank of India | 1,920 |
| 2 | State Bank of India | 1360 |
| 3 | UCO Bank of India | 2635 |
| 4 | Axis Bank | 200 |
| 5 | Allahabad Bank | 2400 |
Some of other impacts due to the scam were:
- Bank finance to the jewelry sector dropped by 10%.
- Life Insurance Corporation (LIC), largest single investor, lost Rs. 1400 crore over three trading sessions.
- Market capitalization of State Bank of India (SBI) eroded by Rs. 8,329 crore.
- Letter of Undertaking (LOUs) and Letter of Comfort (LCs) were discouraged as credit options.
- Credit rating of PNB Bank downgraded.
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