Do you know about the biggest scam in India: PNB SCAM (Explained in terms of Banking)?

Dear Bankersdaily Aspirants,

It’s a huge Scam in Punjab national Bank (PNB) which involves a fraudulent LOU (Letter of Undertaking) for over six years (From 2011 to 2017).

Let us first know the important Banking terms involved in this huge Scam then we will study the story of the scam briefly.

Important Banking Terms Involved In This Huge Scam

  • LOU (Letter of Undertaking)
  • Nostro Account
  • Collateral Security
  • Core Banking Solution (CBS)

LOU (Letter of Undertaking):

LoU (Letter of Undertaking) is an assurance given by one bank to another to meet a liability on behalf of a customer. The LoU is similar to a letter of credit or a guarantee. LoUs are used in international banking transactions. According to norms, the term of a LoU is 180 days, and can be rolled over once for six months.

A LoU is issued for overseas import remittances and involves four parties — an issuing bank, a receiving bank, an importer and a beneficiary entity overseas.

Nostro account

Nostro account refers to an account that a bank holds in a foreign currency in another bank. Nostros, a term derived from the Latin word for “ours,” are frequently used to facilitate foreign exchange and trade transactions.

Society for Worldwide Interbank Financial Telecommunication (SWIFT):

When a LoU is issued, the message of credit transfer is conveyed to overseas banks through the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. This is significant information as it gives the bank’s consent and guarantee.

It generally has three layers of security within the core banking system before it is issued.


To issue SWIFT, an official has to log in and fill up confidential information such as the account number and SWIFT code.

Collateral Security                                                   

Collateral Securities are any assets other than Primary Securities, Which are kept as security against taking credit or a loan. It can also be issued by a third Party or any Intermediary. For Example: Taking a personal loan and Mortgaging your house.

Core Banking Solution (CBS)

Core Banking System where all branches are inter-connected to ensure that the bank customers – regardless of their home branch – are able to operate their account and transact in any of the member branch located anywhere in the world.

Let us read the story of NIRAV MODI:


Residence: Mumbai, India

Occupation: Jeweller and businessman

Nirav Modi one of the leading businessmen in our country in the year 2011 wants to import pearls or diamonds and then sell them. This purchase requires money so he approaches Punjab national bank (PNB) for money. Since he is a businessman he has a current account in Punjab national bank (PNB).

Punjab national bank (PNB) says if you are in need of money we will provide you a loan with 10% interest rate. But he thinks it’s hard and says no. After Nirav Modi told that I need LOU for importing of pears or diamond from Hongkong.

Punjab National Bank can provide loan to any person with collateral security only.But without Collateral Security Punjab national bank (PNB) officials provided the LOU (Letter of Undertaking) to the respective foreign Bank without any record in CBS. Here starts the 1st Fraud by cheating both SWIFT and CBS, because there is no record of providing LOU (Letter of Undertaking) to the foreign bank.

With this letter of Undertaking (LOU) the foreign bank provided the amount to Beneficiary (Hongkong Jewellers). Because Punjab national bank (PNB) provided the 100% guarantee to the foreign bank. If Nirav Modi FAILS to repay Punjab national Bank (PNB) will settle the amount to that Foreign Bank.

Here is the diagram which briefly describes you about the process of providing the fund to the beneficiary (Hongkong jewellers).

According to norms, the term of a LoU is 180 days, and can be rolled over once for six months. Nirav Modi failed to repay the amount after the stipulated time period. So Punjab National Bank asked him to repay. He again asked those officials who provided the 1st LoU to provide 2nd LoU letter of Undertaking for setting the previous amount received from the 1st LoU letter of Undertaking. This remains the repeated process from 2011 to 2016. This Fraudulent came into limelight when those officials got transferred from that branch and also when Nirav Modi urged the new official to provide the New LoU for his business in the year 2017 and he stated that he received LoU for his business from PNB without Collateral security.

They have also found that without any record in CBS (Core Banking Solution), Finacle (Software Used by Punjab National Bank (PNB)) and also in SWIFT. This Fraudulent had happened with the help of Corrupted officials and they finally handed over the case to CBI.

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