Nirav Modi event of fraud and in India, the bank debt crisis

The biggest news in India last week has centered around a billionaire jeweller, Nirav Modi, who has allegedly defrauded of one of India’s largest banks over a billion dollars. Columnist Vivek Kaul explains why the case could only be a sign of a much deeper problem in India of the banking system.

Punjab National Bank (PNB), India is the second largest government-owned bank, with assets of approximately $111.7 billion (£79bn) to March 31, 2017. The total amount of the alleged fraud was estimated to total $1.8 billion.

Reports suggest that Mr Modi is not in the report to the Prime Minister of india Narendra Modi, left the country at the beginning of January. His immediate family also left India during the course of the month.

He is believed to be staying in a luxury hotel in New York city and was last seen at the World Economic Forum in Davos, as part of the Indian delegation, who also had his photo taken with the prime minister.

Mr Modi may not have been formally accused by the Indian authorities yet, but several studies have begun. The police also arrested two officials of the bank and a business associate of Mr Modi in suspicion of him.

In a letter to the PNB, the entrepreneur said that he owed the bank $775m and not $1.8 billion. He has also denied the allegations and said that the “wrongly quoted” responsibility and the “media” had “destroyed my brand and business, and now have limited ability to recover all the shares, leaving a trail of unpaid debts”.

The bank has not commented on the nature of the fraud, but the analysis so far suggests that what the billionaire is accused of involves PNB guaranteeing loans through the issuance of a letter of undertaking (LOU).

This means that every time a loan is due, Mr. Ways would get PNB to open another LOU equivalent to the amount of the loan, plus the interest on it. The money from the new LOU was used to pay off the loan and the interest due on the previous LOU.

So, in fact, would never have paid off the initial loan.


But how do you Nirav Modi alleged fraud look in the light of the other fraud that the Indian banks face?

In July 2017, the ministry of finance has shared some data showing that PNB and control systems were in bad shape, which meant that he defrauded significantly more than other banks.

The data show that between the years 2012-2013 and 2016-2017, the Indian banks saw a total of 22,949 cases of fraud, with total losses of banks in the amount of $10.8 billion.
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78 banks in the list, PNB to face the highest losses when it came to fraud. Over the five-year period, the bank faced up to 942 cases with losses of $1.4 billion.

Also, more significantly, PNB facing multiple cases of fraud, the country’s largest bank, State Bank of India, which has a capital base of 4.6 times larger than PNB.

That said, the average fraud in PNB cost the bank 95.5 m rupees ($1.48 m; £1.05 m). In Nirav Modi of the case, the size of the alleged fraud is much larger than the size of the average fraud PNB has faced in recent years.

This proves the accusation against Nirav Modi is the most petty bank fraud. It is basically more along the lines of a large bank loan default, which many of India’s crony capitalists specialize in.

India: government owned banks have been under pressure in the face of corporate loan default in recent years.

September 2017, the impaired loans ratio of these banks has reached 13.5%. Essentially, this means that of every 100 rupees of loans granted by these banks, 13.5 rupees has been paid.

A bad loan is a loan that is not repaid for a period of 90 days or more. The corporate default rate is even higher.

In large part due to the company, recovery of debts, Indian banks have had to write off loans to a value of approximately $38.8 billion for the period of five years ending 31 March 2017.

Nirav Modi alleged bank fraud will only add to this.

To keep these banks going, the Indian government has regularly to maintain the injection of capital into them.

In fact, an estimate made by the daily newspaper the Times of India suggests that, over the past 11 years, the government has injected $40.3 billion in the banks of which he is the owner.

Every rupee that goes in these banks has taken away the most important sectors as agriculture, education, health and defence.

The reason why many Indian businessmen blatantly default on the loans because they know that, given India’s slow judicial system and their proximity to the politicians, their chances of getting away with a loan default are very high.

If shown, the Nirav Modi case of only exposing a small part of a larger and more meaningful image for the country.

Vivek Kaul is the author of the India is a strong Government—The State tv and How You are doing Evil to Us.