India’s Biggest Ever Banking Scandal: Billionaire Jeweller Accused of ‘Gaming the System’

In the past week, India’s news have been dominated by billionaire jeweller, Nirav Modi (no relation to the Indian Prime Minister), who has been accused of defrauding India’s second largest government-owned bank of $1.8 billion or the biggest banking fraud the country has ever witnessed. Mr. Modi, who calls himself “haute diamantaire”, has been the preferred jeweller of both Hollywood and Bollywood celebrities, including actress Priyanka Chopra, who was appointed brand ambassador by the company last year. Earlier this month, Punjab National Bank (PNB) first filed a criminal complaint against the billionaire for causing the bank a “wrongful loss” of an estimated $40 million. However, as soon as investigations began, it was discovered that the actual figure was $1.77 billion – allegedly the result of a series of fraudulent transactions carried out in the past 7 years. Analysts suggest that Nirav Modi and his uncle Mehul Choksi have connived with PNB employees to create fake letters of undertaking (LoUs) – a guarantee that a bank is obliged to repay the loan if the actual borrower fails to do so – using them to secure loans from overseas branches of other, predominantly Indian, banks. This would mean that every time a loan was due, Mr. Modi and his uncle would ask bank employees to open another LoU equivalent to the loan amount, including the interest that was due on it. The money from the new LoU would then be used to pay off the loan and the interest due on the previous LoU.


What we know so far

Conveniently, it has been reported that Nirav Modi and his entire family left India during the first week of the year. He was seen at the World Economic Forum in Davos – only six days before PNB first filed a criminal complaint against Modi and his associates – where he even posed for a group photo with India’s Prime Minister Narendra Modi. The alleged scam has prompted a number of protests against the jeweller and the Indian Government, as well as a heated debate and hundreds of memes on social media.

Thus far, the government has made some key arrests, including two bank officials and a business associate of Mr. Modi’s on suspicion of helping him, whilst global manhunt has been launched by India’s Central Bureau of Investigation (CBI) for the billionaire and his uncle, whose passports have been revoked. Mr. Modi’s lawyer has claimed that his client ‘went out of India for business purpose’ and that his family members normally ‘stay abroad most of the time’. Mr. Choksi’s firm, Gitanjali Gems, has denied any involvement in the fraud scandal.

The Income Tax Department’s investigations have also shed light on the Nirav Modi Group’s unaccounted and unexplained funds, major discrepancies in stock valuations and instances of suspicious foreign funding. It has also been revealed that the jewellery brand accepted payments in cash on a regular basis, without accounting for all of them.


The Bigger Picture: India’s Fraud Problem

But how does the alleged scam look when compared to other frauds that Indian banks are faced with routinely?

The typical fraud cases in India refer to cases where the borrower intentionally tries to deceive the lending bank without repaying the loan.

In an article for BBC News, Vivek Kaul, author of India’s Big Government—The Intrusive State and How It is Hurting Us, points out that in July 2017, India’s Finance Ministry shared data detailing that PNB’s controls were in bad shape and when compared to other 77 banks, the second largest government-owned bank  in the country was facing the highest losses when it came to fraud between the years 2012-2013 and 2016-2017. During the same period of time, Indian banks saw total losses amounting to $10.8bn, with PNB’s losses amounting to $1.4bn.

More generally, over the last few years, India’s government-owned banks have been experiencing issues related to corporate loan defaults – with their bad loans ratio stood at 13.5% as of September 2017. They have been forced to write off loans worth an estimated $38.8bn billion for the period of five years ending March 31, 2017. The Times of India Newspaper has estimated that in the past 11 years, the government has injected around $40.3bn into the banking sector. How could Indian people keep calm when it’s so clear that their government has been spending capital that could be used for healthcare, education and agriculture on trying to save that banks that it owns?

What makes all of this truly worrying is that it might be only the tip of an iceberg – the rest of the iceberg being a problem that runs much deeper. Who knows what tomorrow may bring for Nirav Modi’s case, PNB and the Indian banking system at large.