Nirav Modi's PNB fraud reminiscent of Jatin Mehta's Winsome Diamond Group case

India's public sector banks are facing the biggest ever credibility crisis and rightly so. Barely a month has passed since the government tried to clear staggering bad loans mess by infusing billions of taxpayers' money, Punjab National Bank on Monday dropped yet another bombshell by declaring that it had been defrauded with Rs 11,400 crore. The bank which happens to be the second largest public sector lender has claimed that the fraudulent transactions were done in connivance of a 'junior level official' at its Brady House branch in Mumbai.

While it is the job of the investigating agencies to find out who engineered the billion-dollar scam, there is no denying the fact that there was a disintegrated system in place that allowed the official to execute the fraud and stay undetected for so long. PNB's Rs 11,400 crore fraud may be the biggest banking fraud but it isn't surprising at all. BusinessToday.in earlier reported that during the last five financial years, frauds have increased substantially both in volume and value terms. Interestingly, the PNB fraud is reminiscent of Winsome Diamond Group case, in which too the PNB had suffered the most.  

What is the Winsome Diamond Group case?

Until the PNB declared its fraudulent transactions on Monday, the Winsome Diamond Group scam was country's second largest banking fraud after Kingfisher Airlines. Winsome Group promoter Jatin Mehta is also considered one of the biggest corporate defaulters.

The Winsome Diamond Group had taken a loan of Rs 6,800 crore from a consortium of banks led by the Standard Chartered Bank.  Of the total loan amount, PNB has the highest exposure of Rs 1,800 crore. The loans were taken by three group companies - Winsome Diamond & Jewellers, Forever Precious Diamond and Jewellery, Suraj Diamonds.

Similar to the letter of undertaking, albeit its dubious nature, which allowed Nirav Modi to raise credit, the lenders had issued standby letters of credit in favour of international bullion banks to supply gold to Winsome Group companies. The letter of credit was essentially an understanding between Indian banks and the international bullion banks that if the Winsome Group failed to pay the bullion banks, the Indian lenders would pay for the gold purchase.

Unfortunately for the banks in India, the worst came true. The Diamond Group failed to pay the bullion banks, saying that the group's customers in the Gulf region had defaulted on payments due to losses of USD 1 billion in derivatives and commodities trading. In 2013, the Diamond Group started defaulting on loans and later that year banks notified their decision to term the group a wilful defaulter.

Even though the case is with the CBI, the banks in India have not been able to do much to force the Winsome Diamond Group to pay up. That's because Winsome Group won the case in UAE in which the Group claimed it had suffered a $ 1 billion (Rs 6,500 crore) loss due to non-payment from 13 UAE-based firms. Following the Winsome Diamond's legal victory, UAE authorities have reportedly refused to provide Indian government agencies with  information on the UAE-based firms to take their investigation forward.