Diamonds to Defaults


Lalit Modi, Vijay Mallya…These names make our eyes wider and curiosity creeps in whenever we read these names. The latest addition to this list is Nirav Modi. Yes, the flamboyant jewelry designer based in Mumbai. Also, in the list is his uncle Mehul Choksi who runs Gitanjali Jewels. As of now, both are on the run. They both have fraudulently exposed and misused the loopholes in the system and have siphoned off INR 11,400 crores from the banking system. Yes, the bank employees were involved too. Some arrests have been made though, but this certainly puts our banking system into arrest as well.

This is the dark side of the crony capitalism where our country is being pushed right now. JUST TWO junior level greedy employees have brought a big public sector national bank on its knees swiftly by using the SWIFT code. As per some primary analysis, to recover from this fraud, the bank PNB will require the amount equal to the profit of its last 10 years! This shows how vulnerable our financial system has become.

How did this happen?

A criminal complaint was filed with Central Bureau of Investigation (CBI) by PNB officials against three companies and four people, including billionaire jeweller Nirav Modi and Mehul Choksi, saying they had defrauded the bank and caused a loss of INR 280 crore. Further investigation unearthed that this fraudulent and unauthorised transactions were totaling in tune up to INR 11,400 crores.

Deputy manager Gokulnath Shetty, who was posted at PNBs foreign exchange department in Mumbai allegedly along with another official Manoj Kharat took bribes and fraudulently issued LoUs (Letter of Undertaking) to the firms owned by Nirav Modi and associates without following prescribed guidelines avoiding detection of transactions.

As quoted by PNB in a letter as warning to other banks - "It was found through SWIFT trail that one 'junior level' branch official unauthorisedly and fraudulently issued Letter of Undertakings (LoUs) on behalf of some companies belonging to Nirav Modi Group for availing buyers credit from overseas branches of Indian banks." None of the transactions were routed through the CBS system, thus avoiding early detection of fraudulent activity, it added.

At the time of issuing LoUs for a smaller amount by SWIFT, the transaction was routed through the CBS system but subsequently, amendments were made in these LoUs by substantially enhancing the amount of LoUs and transmitted through SWIFT without routing these enhancements through CBS.

Further, LOUs were opened in favour of overseas branches of Indian banks for import of pearls for a period of one year, for which as per RBI guidelines, the total time period allowed is 90 days from the date of shipment. Union Bank of India, Allahabad Bank and Axis Bank are said to have offered credit based on LOUs issued by PNB.

More interesting story is how was this fraud was detected.

It was more like Nirav Modi himself dug his grave. The bank employees through whom he colluded in the first place to obtain the fraudulent LOUs, they retired. The new officers in their place sought 100 percent cash margins to raise buyers’ credit as per the guidelines. But the firms of Nirav Modi contested the same saying they had availed of the facility from as early as 2010. It’s like they contested their own fraud!

And mind you, these are not the only two businessmen in diamond trade who have done this. Jatin Mehta of Winsome Diamonds is also one of these kinds who has defaulted around INR 6800 crores. Yes, the rich like these are swindling the money in these ways and the middle class is continuously at the front end to bear the brunt of the taxes to fill these pockets.

Impact on industry

The actions of these people have consequences too. In India, Surat is known as the diamond hub and Antwerp in Belgium is also another hub too. We have close trade ties in case of diamonds as approximately 29% of rough diamonds that come to India for cutting and polishing come from Belgium. Interestingly, before shifting base to Mumbai in 2010, Nirav Modi and his family was based out of Antwerp itself.

I have been reading follow ups of news in this case and I found several news articles where the diamond traders and people from their affiliated federation are worried.

If you go and talk to any diamond merchant especially in Mumbai Surat stretch, they will tell you how bad this has affected them. As a gem and jewellery exporter given the stringent turnover clause, you can’t get more than 20 to 30% exposure of your working capital credit from banks, no matter how strong your financials are. Why? Bankers are wary of this precious stone business because these are more susceptible to fraud than any other item or product. This also dents the opportunities in SME sector for exports of such diamonds as banks already ask for high collateral for getting the limit sanctioned.

Such meteoric rise of Nirav Modi had puzzled them all.

Impact on Banking System

As per data released by RBI and report prepared by Times of India, it shows that 1 bank official is held for fraud every 4 hours in a public-sector bank (PSB). As per the report, more than 5,200 officials have been held for fraud from January 1, 2015 to March 31, 2017. Around total of 17,000 cases of fraud were reported in the given period. Out these cases, over 2,000 cases had an involvement of a bank official.

An RTI filed by social activist Chandrashekhar Gaud, since 2012 -13 till September 2017, banks have written off around INR 3.68 lakh crores from its accounts on account of bad or doubtful debts. The amounts written off each year are on increasing trend. In FY 17-18 alone till September, banks have written off around INR 66,000 crores!

The banks, their board of directors, their auditors, and audit committees are at a fault here. They have failed to do their basic job. You try for a loan and see the list of documentation you have to get done to obtain a loan. And even after such stringent documentation, the banks are failing. It is such a hard thing not to believe that no trace or evidence was unearthed during the whole 7 years!!!

I had been thinking about what RBI is doing to prevent all of this. It has been pushing banks to put a mechanism in place to curb and prevent such incidents. But the harsh reality is, even though RBI has framed rules and guidelines, it doesn’t change the motive of people. This reminds me of a statement by Father of the nation, Mahatma Gandhi – “There is enough on this planet for everyone’s need but not for everyone’s greed!

This inability of banks to tackle bad loans has weakened banks to an extent that they have been unable to lend while the government has had to use tax payer money for a bailout. This is how the money is being lost. We need to thank our ex RBI governor Mr. Raghuram Rajan for forcing the hand of the government and the banks to clean their balance sheet. I wonder what would have been the scene hadn’t he done this! We were or maybe we still are sitting on the brink of the collapse of our financial system!

The dichotomy is such that we middle class end up paying penalties and interests for not maintaining monthly account balance, and people here are siphoning off the money!