Nirav Modi, a billionaire diamond merchant and a loot and flee breed, followed the footsteps of his predecessors Vijay Mallya and Lalit Modi. Basically, for the import of diamonds and pearls requires a huge amount of money. In the case of Nirav Modi, he approached Punjab National Bank (PNB.) As per the existing practices, the bank will offer the importer the required amount with a 10% interest rate. The interest rate being high tempts the importer to take a foreign currency loan.

London Interbank Offered Rate (LIBOR) is a benchmark for short term loans and serves as a base for calculating interest rates worldwide. So in the place of a 10% interest, one can easily get a loan at 3.5 to 4% interest. However, an importer would face difficulties in the loan process. Foreign banks do not lend money without knowing the credentials of the borrower. This is where PNB played its role; Nirav Modi requested for a Letter of Understanding (LoU) from PNB. A LoU is a guarantee from the bank; the borrower will pay back the loan amount.

The LoU operates via the Society for Worldwide Interbank Financial Telecommunication (SWIFT,) a message service for banks. A SWIFT message poises as a proof the borrower will pay back the amount within 180 days. SWIFT is the reason why foreign banks lend the amount to the borrower. The foreign banks receive interest at LIBOR while the mediating banks (PNB) charge around 2% as its fee for the LoUs.

Foreign banks or foreign branches of Indian banks refrain from giving the money straight to the borrower. With the LoUs as an assurance, the foreign banks lend money; the bank (PNB) acts as a guarantor. If the amount is not repaid within 180 days; the borrower has two options.
1. Declare bankruptcy; the bank will sell the collateral coverage to recover the amount.
2. The borrower can approach the bank and request for another LoU. The new LoU amount adds up to the previous loan interest.

However, PNB agreed to issue another LoU and several ones thereafter adding the amount to Rs. 11,400 crores. This fraud has exposed the supervision lapses at PNB adding to the failure of internal controls. This could have been easily avoided if tight scrutiny was done and audits were conducted properly. The Reserve bank of India (RBI) said they have undertaken a supervisory assessment of control systems in the banks and will take appropriate action.

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