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➔ PSB’s are already being recapitalised by the ➔ PNB (Second largest PSB) discovered
Government due to bad loans (INR 10 Trillion) fraudulent transactions worth $1.77 Billion
arising from a single branch
➔ Initially reported as INR 280 crores which on ➔ Additional exposure of $145 Million (INR 9.2
investigation grew to INR 11,300 crores Billion) uncovered by PNB yesterday (March 13)
LoU SWIFT
Letter of Undertaking, a type of bank Society of Worldwide Interbank Financial
guarantee which allows its customer to raise Telecommunications
money from an overseas bank for short term Message of credit transfer upon issuance of
credit. Notifications about LoU’s are LoU is conveyed through the SWIFT system
transferred through SWIFT.
➔ 3 Layers of Security
➔ Need for LoU Maker | Checker | Verifier
Important Points
Domestic Bank Overseas Bank Business need money to
finance purchases
abroad
International lending
rates are lower
Important Points
Domestic Bank Overseas Bank
Buyer contacts his
domestic bank for a LoU
Nostro account is
Money U domestic bank’s account
Transfer Lo in an overseas bank
(foreign currency
account)
Buyer Seller
Timeline of the Fraud
2011 August 2016
RBI sends a circular to all Indian lenders, advising
PNB employee allegedly starts
them to make sure their internal software, core
providing fraudulent letters of
banking solution or CBS, is properly integrated
understanding to Modi and his
with Swift
associates
2011 2016
2017 2018
➔ Trade Finance takes a hit, businesses relying on imports suffer as premiums soar
The drama
continues
The Irony
Is Nirav Modi still a billionaire ?
A look into forex markets
Banks reluctance to issue LoU and
Letter of credits have crashed one
year forward market
Tax liability of the bank will depend on how the INR 129 billion
LoUs are reflected in the bank books
That’s all folks !
Finance Discussion Group, IIT Kanpur