Tags:
Journalism of Courage
Even though it is being suggested that the issuance of Letters of Undertaking (LOUs) for borrowing requirement of Nirav Modi’s firms abroad, from a Mumbai branch of PNB, started as early as 2011, bankers say that it is highly unlikely.
At least three bankers, who look into LOU operations, said it could have started with a much smaller sum few years ago and ballooned into a huge amount as a result of large borrowings in the recent past. They suggested that it could also be a result of interest accumulation over several years over scores of cycles of rollover of LOUs as the term of the LOU for trade credit (as in case of jewellery business) could be 90 days or at the max 180 days.
Read | Inside the Punjab National Bank fraud: What an LoU is, how case may impact the bank
“It is very likely that initially the amount was small and borrowings grew exponentially over the last couple of years against LOUs issued by PNB,” said a banker with a large private bank. He said that while the buyer credit in case of capital expenditure can go up to 3 years, in case of business of jewellers where it is trade credit, the term is mostly 90 days, though it can be extended to 180 days in some cases.
A PNB official said on conditions of anonymity, “The original guarantee amount could have been anywhere between Rs 1,000 crore and Rs 2,000 crore, however, with subsequent rollovers and interest accumulation it ballooned to $1.77 billion.”
Bankers say that the process and risk management, seems to be at the heart of the fraud. While job rotation, mandatory leaves, regular audits are key to job roles such as of those issuing LOUs, “most banks have 3-4 units within the bank involved in such processes so that there are several filters, and oversight by one can be identified by another,” said another banker. He added that it is “very strange” to see that the same bunch of officials held the position and handled a key operation at the same place for so many years as it is known to build “operational risk”. A PNB official also added that, “casual approach by various departments may be one of the reasons for not identifying the fraud”.
Read | BJP and Congress blame each other: This happened under your watch
One banker said that it’s a collective mistake of banks as when LOUs are raised for big amounts, even the bank that provides the fund does a basic due diligence and a KYC on the borrower. “Clearly, in this case the borrower does not have a credible track record and that should have raised alarm for banks who provided the fund against the LOUs,” he said.
