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All You Need To Know About the PNB Scam and Nirav Modi

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All You Need To Know About the PNB Scam and Nirav Modi

You may or may not have heard of Nirav Modi before, but now its time to know about him and the scam that recently took place. Nirav Modi is a diamond jewelry designer and a billionaire. In the Forbes list of India’s billionaires in 2017, he was ranked 57. He founded the Nirav Modi chain of diamond jewelry retail stores. He is also the Chairman of Firestar International, which is the parent company of the Nirav Modi chain. Firestar International owns stores in key markets all over the world. Taraji Penda Henson, the star of the Oscar-nominated film Hidden Figures wore his designs. Many other celebrities across the globe wore his designed jewelry along with Dakota Johnson. Indian famous actress, Priyanka Chopra is the brand ambassador for his company.

What is the Scam?

Recently, the news about Punjab National Bank has shook people. PNB is the country’s second-largest public sector lender, is now in the middle of Rs 11,400 crore transaction fraud case. On 14 February, Bombay Stock Exchange got the information from PNB authorized officials that they have detected some fraudulent and unauthorized transactions in one of its branches in Mumbai. Approximately, $ 1771.69 million was transacted without the authorization. Once the announcement was done, the share price of the State-owned bank went down by 10%.

Moreover, the Central Bureau of Investigation (CBI) received two complaints from PNB against the diamond jewelry designer, Nirav Modi. He was alleged for transacting worth Rs 11,400 crore fraudulently. He is already under the investigation for fraud case of Rs 280 crore. CBI has filed a new complaint against him yesterday morning.

How It Came Into Notice?

Earlier, the PNB filled the complaint with the CBI on January 28 regarding the fraudulent issuance of Letters of Undertakings. It was detected at the Mid Corporate Branch, Brady House in Mumbai. It was detected that the set of partnership firms named Diamond R US, Solar Exports, and Stellar Diamonds had approached the bank on January 16 with a set of import documents and requested for Buyer’s Credit to make payments to overseas suppliers. These firms are mainly headed by Nirav Modi, his brother Nishal Modi, his wife Ami Nirav Modi as partners.

In general, the buyer’s credit is a short-term loan facility that is provided by the bank to the importer in order to finance goods and services. In international trade, this is a common mode of transaction. Here a bank is responsible to extend credit to the importer and a finance agency based in the exporter’s country guarantees the loan.

Since the branch officials found that there is no sanctioned limit in the name of the firms, thus they requested the firms to furnish 100% cash margin for issuing the LOU for raising the Buyer’s Credit. But, then the firms challenged that earlier they have been availing this facility. However, when the branch officials invested they found that there were no branch records that substantiate this.

After a long investigation, the bank officials discovered that two of its employees had fraudulently issued LOUs in the past without following prescribed procedures and approvals. It was then; it came into sight that the employees had then transmitted SWIFT instructions to the overseas branches of Indian banks for raising Buyer’s Credit without making entries in the banking system to avoid detection.

As per the reports, it is said that the funds so raised for the payment of the Import Bills have not been utilized for such purposes in many cases. Believing in the statements mentioned in FIR, five of the SWIFT messages were issued to Allahabad Bank in Hong Kong and three to Axis Bank in Hong Kong.

Following Measures Can Be Taken By RBI to Avoid Scams

The government is set to promulgate an Ordinance to help banks tackle the menace of mounting bad loans, which is denting profits of lenders, slowing credit flow to industry and hurting the economy. The deputy governor of Reserve Bank of India, Viral Acharya has also said that government should now consider the important matter of reprivatizing government banks in order to avoid scams and NPA’s. However, Apart from privatizing the public sector banks, there are several other ways that can be taken by the government to speed up the recovery of NPA’s.

  1. Amendment in Banking Law to Give RBI More Powers

One of the best ways could be the amendment in banking law to give RBI more powers. It is recommended to amend the Banking Regulation Act so that more powers can be given to RBI to monitor bank accounts of big defaulters. This will enable setting up of a committee to oversee companies that have been the biggest defaulters of loans. RBI must also create stricter rules for joint lenders’ forum and oversight committee to limit NPAs.

However, at present, there is no provision for setting up oversight committees.

  1. Strict NPA recovery rules

With the help of strict rules only, the scams and NPA’s can be recovered. Over the years, the government has endorsed strict rules to recover assets of defaulters. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act or Sarfaesi Act of 2002 were amended in 2016 as it took banks years to recover the assets.

Veteran economists have also pointed out that the NPA problem has to be tackled before the time a company starts defaulting. This needs a risk assessment by the lenders and red-flagging the early signs of a possible default.

However, the idea of privatizing the public sector banks seems to be very controversial. The idea of reversing a measure taken during India’s supposedly socialist heyday is still so controversial is unclear. After all, government ownership of banks is perhaps the most prominent example of the “commanding heights” of the economy being under state control. It is believed that the time has come to dismantle this relic of a command and control economy.

It is not the first time that Acharya has asked the government for privatization of India’s state-owned banks. He has raised this issue effectively, even before he became a regulator. He also wrote an article in much more plainly and forthrightly way on the topic is state ownership in the Indian banking sector desirable? He wrote this for the National Council of Applied Economic Research’s India Policy Forum 2011-12. In this article, he pointed out two main reasons.

Why Government Should Privatize All the Public Sector Bank?

  1. The first reason was that state ownership creates the severe moral hazard of directing bank lending for politically expedient goals and of bailouts when such lending goes bad.
  2. Another important reason to convert all public sector banks into private banks is that state ownership restricts the ability of state-owned banks from raising arm’s length capital against state’s stake, strangling their growth and keeping these banks smaller than it need be.

These two reasons are enough to demand for the privatization of public sector banks.

We all have witnessed that all the state-owned banks have gone through huge losses. It is also an open secret that state-owned banks perform poorly on a host of parameters compared to private sector banks. You can simply and easily compare both the sets of the bank to their stock market valuations.

By comparing through stock market valuation, you will get to know what the market thinks about public sector banks. It could be seen in their price to book value multiples that are around 1.2 for State Bank of India. This is the highest book value among public sector banks. While among private sector banks, HDFC Bank Ltd holds the highest price to book value of 3.7.

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