The $1.8 billion Punjab National Bank-Nirav Modi scam is throwing up more questions than answers — Quartz

As the $1.77 billion (over Rs11,000 crore) fraud at Punjab National Bank (PNB) unravels, the unanswered questions are piling up.

The doubts raised include how India’s biggest ever banking scam went unnoticed for seven years and why a PNB employee, who allegedly helped orchestrate it, wasn’t transferred despite being due twice in his seven-year stint at Mumbai’s Brady House branch. The roles of the management, auditor, and employees, besides those of the accused, are under scrutiny.

Meanwhile, the main accused, Nirav Modi, is on the run. And the finance ministry, the enforcement directorate (ED), and the income tax department (I-T) have got involved, trying to take evasive action. But is this all too little too late?

The probe development

Modi, along with his family, has reportedly fled the country. His maternal uncle and co-accused, Mehul Choksi, managing director of Gitanjali Gems, is also untraceable.

On Feb. 16, India’s foreign ministry suspended the passports of Modi and Choksi for four weeks. It gave them a week to respond to a notice asking why these shouldn’t be revoked. Failure to respond convincingly will lead to revocation, a ministry statement said.

The Central Bureau of Investigation (CBI) has nabbed two PNB employees, Gokulnath Shetty (retired) and Manoj Kharat, who were named in the case filed by PNB. An employee of Modi’s firm has also been arrested. A special court on Saturday granted CBI custody of the three accused till March 03.

The ED, in the meantime, seized Modi and Choksi’s assets apparently worth Rs5,674 crore from over 70 locations across the country.

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Did the government know?

Two whistleblowers have come forward stating that the concerns they’d raised over the matter years ago were brushed aside by authorities.

In 2013, Dinesh Dubey, a former government-appointed nominee director on the Allahabad Bank board, had raised a red flag on loans being granted to Gitanjali Gems despite Choksi not repaying old ones. Dubey’s opposition was ignored and he quit the bank’s board soon after that.

Hari Prasad SV, who owns a Bengaluru-based Gitanjali franchise, reportedly wrote to the prime minister’s office (PMO) in 2016, claiming that Choksi has taken loans worth nearly Rs10,000 crore based on a collateral of only Rs30 crore. Nothing came of Prasad’s letter either and the complaint was closed abruptly.

Bank clean-up

The fraud, estimated to equal a third of PNB’s market cap on Feb. 14, has spooked investors. The stock has lost over 17% from Rs145.80 (on Feb. 14) and was trading close to Rs120 on Feb. 19 at the time of publishing (around 11am).

To allay investors’ fears, the management hosted a conference call for analysts on Feb. 16. During the call, it explained that even though the bank’s bad-loan pile may increase, it has enough capital to tide over the crisis. However, the call ended abruptly after the management realised that it was being telecast on live television. Besides, senior bank officials also failed to answer key questions.

“Till now the liability has not been fully crystalised, so we don’t have the exact details on the impact it will have on the balance sheet,” said an analyst with a domestic brokerage house, who attended the call. “The saving grace is that PNB has raised Rs5,000 crore via qualified institutional placement in December 2017 and the government is also going to pump in over Rs5,000 crore into the bank. These will provide some cushion to the balance sheet.”

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The lender is also taking steps to allay depositors’ fears. In an update on its Facebook page, which has over 62,000 followers, it assured customers of the bank’s safety. “It (the fraud) started in March, 2011. We have put our inspection & audit department into action and have not found any other similar incidence,” said the note.

Other banks

PNB had earlier warned that the crisis may spill over to other banks. In the aftermath of the exposé, it issued a cautionary note to about 30 other lenders detailing the modus operandi.

In the following days, the State Bank of India, the country’s largest lender, admitted that it had issued loans of $212 million against PNB’s letters of undertaking. Kolkata-based UCO bank has an exposure of $411.82 million. Others affected include Union Bank ($300 million) and Allahabad Bank ($366.87 million).

It isn’t clear yet if PNB or the other banks will bear the brunt if Nirav Modi is unable to pay. “If it (the LoU) was forged or invalid, then the sanctioning party (other banks) will become the bearer of liability. And if the sanctioning bank had asked for confirmation and if PNB had confirmed it, then again the responsibility shifts to PNB,” R Gandhi, former deputy governor of the Reserve Bank of India, told Quartz last week.