PNB Fraud an explainer

This is based on publicly available info. Where I try to explain what has probably happened. Before that, you have to understand certain things:

  1. Lou:Letter of Undertaking in simple terms is like a promise one bank gives to another bank if loan defaults

An Indian bank assuring a person’s full payment of debt in case he/she fails covers the loan and is nearly risk free advance for foreign banker.
So if a foreign bank/foreign branch of Indian Bank receives an LOU then they issue what is called as "buyers credit"buyers credit is a very short term loan given by Foreign bank to an importer for purchase of goods. The banks credit loan funds to what is called as a “Nostro account” and then its paid to the supplierSwift message: its a messaging network used by banks to securely transmit instruction to other banks outside India. Stuff/instructions flow via swift.

Everything depends on Now the alleged fraud:
Some empl allegedly issued LOU. however they had not do entries in the system nor had followed procedure to issue the same.

Further they also sent SWIFT instructions to foreign branches of Indian banks
It had dual effect: 1 when entries were not made in system it never became a “loan” in their books

  1. When LOU/swift instructions went, other banks gave buyers credit based on that with an inherent faith that PNB is underwriting all those advances.
    So how did it go on for so long
    I am only guessing here. When foreign bank gave Buyer credit and goods got supplied to Indian importer he/she kept on paying off those amounts and again same process done for new imports.

How did it get detected then? As per some news, the accused firm approached PNB with a fresh request. Person who had done alleged frauds had resigned. New guy said u keep 100% margin n I will issue LOU. Firm said earlier we didn’t. alarm bells guy digs files finds fraud.


The mystery here is how SWIFT has been kept segregated from the core banking system run on FINACLE

@bavesh is right.
@dvram, SWIFT is a different network and the basic condition is it should not be connected to any bank’s core banking software.
all the messages are to be typed manually in the templates provided by SWIFT in nodes and then authenticated by two persons and then uploaded by third person in the SWIFT server itself, which is placed in the branch.

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Impact of PNB image

Large amount Money Being Made I think So