How Nirav Modi Dazzled and Deceived the Banking System

The Nirav Modi scam is a shocking example of systemic failure and the rot in the banking system

- Namrata Biji Ahuja

On January 16, representatives of three partnership firms of diamond merchants Nirav Modi and Mehul Choksi (Modi is Choksi’s nephew) came to the Brady House branch of Punjab National Bank in Mumbai. They presented a set of import documents with request to allow buyer’s credit for making payment to the overseas suppliers. The branch officials requested them to furnish at least 100 per cent cash margin for issuing letters of undertaking (LoUs) for raising buyer’s credit.

LoUs are a form of bank guarantee that allow a customer to raise money from a foreign branch of another bank. When an LoU is issued, the message of credit is conveyed to the overseas bank through a system called the Society for Worldwide Interbank Financial Communication (SWIFT). This system transmits the critical information stamping the bank’s consent on the credit. It can be accessed only after filling up confidential details like the account number and SWIFT code.

The gentlemen who represented Modi and Choksi’s companies, however, were not used to being asked or told about the procedures. They argued with the bank officials that they had procured LoUs in the past without this procedure. The bank officials could not find any past records. But on close examination of the preliminary records, they found out that a retired deputy manager, Gokulnath Shetty, posted at the branch from 2010 to 2017, had fraudulently issued LoUs without following the prescribed procedures of documentation and getting approvals and making entries in the bank’s trade finance module of the core banking system.