New Delhi, Feb 20 (Business Standard): Breaking his silence over the Rs 114 billion fraud at India's second-biggest bank, PNB, Finance Minister Arun Jaitley on Tuesday said the state will chase down cheaters to the end even as he took the management of the lender to task for its failure to check the delinquents. Without naming either the alleged kingpin of the fraud, billionaire jeweller Nirav Modi, or Punjab National Bank, Jaitley questioned the ethics of some businesses in the country and asked as to why the bank's internal and external auditors could not detect the fraud which had been going on for 7 long years.

"It is incumbent on us as a state, till the last legitimate capacity of the state, to chase these people (fraudsters) to the last possible conclusion to make sure the country is not cheated," he said addressing the annual meeting of Association of Development Financial Institutions in Asia & Pacific (ADFIAP). Jaitley said the government had been step by step addressing issues like high-level of bad debts and need for more capital, but the effort has been put to challenge with the unravelling of the fraud.

He reminded the public sector banks that Prime Minister Narendra Modi gave managements the autonomy they needed with none from the government calling. "When authority is given to the managements you are expected to utilise that authority effectively and in a right manner. Therefore the question for the management itself is were they found lacking? And on the face of it the answer seems yes they were," he said. The lenders, he said, were "unable to check who amongst them were delinquent".

He went on to ask what the auditors were doing. "Both internal and external auditors really have looked the other way or failed to detect," he said. Chartered accountants and those who control the discipline, should start introspection and "say what legitimate actions are to be taken", he said. "And also there is an important challenge where the supervisory agencies are now to introspect as what are the additional mechanisms they have to put in place to ensure that stray cases don't become a pattern again," he said. "And stray cases are nipped in the bud and an example be made out of people that these bad examples itself are never to be repeated."

Jaitley said frauds have a cost to the country as well as to the tax payer. "It's a direct cost and it has an indirect cost that it impinges on development, which impinges on the lending capacity of banks as an institution and therefore impinges upon developmental finance," he said.

Earlier, Nirav Modi wrote to banks, saying that the firms controlled by him were unable to clear their dues because of the actions taken in "haste" by PNB. Further, he asked the banks to pay salaries to the 2,200 employees working in those firms.

Here are what Modi wrote in his letter and the top developments in the largest banking scam in the country's history:

1) 'Nirav Modi won't be found guilty': Nirav Modi's lawyer Vijay Aggarwal has said that the case against his client will collapse just like the 2G scam and the Bofors matter.

Speaking to news agency ANI, Aggarwal said that the probe agencies would not be able to prove the charges against Nirav Modi in the court of law.

"Like 2G Scam and Bofors matter, this case will also collapse. Agencies are making noises in the media but they will not be able to prove the charges in a court of law. I am sure Nirav Modi will not be found guilty," the lawyer said.

2) Fitch move hints at the possibility of PNB ratings downgrade: On Tuesday, US ratings agency Fitch placed PNB on 'Rating Watch Negative' (RWN), reflecting the possibility of a downgrade following the fraud.

The fraud has raised questions on both internal and external risk controls as well as the quality of management supervision considering that the fraud went undetected for several years, Fitch said. "Fitch Ratings has placed Punjab National Bank's (PNB) Viability Rating of 'bb' on Rating Watch Negative (RWN), following the large fraud reported by PNB," the US-based agency said in a statement.

The Viability Rating measures creditworthiness of a financial institution and reflects the likelihood of the entity to fail, as per Fitch. The RWN reflects the possibility of a downgrade of PNB's Viability Rating.

"Fitch will resolve the Rating Watch once more clarity emerges on the extent of control failures and the impact on PNB's financial position," it added. Stating that the fraud event has been a setback for the bank in its reputation and has had a capital market impact, Fitch said it will monitor PNB's full liability, potential recoveries and the extent of additional fresh capital from both internal and external sources to determine if the bank's financial position is no longer consistent with the current viability rating.

3) PNB's 'haste' to blame: Nirav Modi, the alleged kingpin of the largest banking scam in the country's history, has said PNB's overzealous approach shut the doors on his ability to clear the dues. "In the anxiety to recover your dues immediately, despite my offer, your actions have destroyed my brand and the business and have now restricted your ability to recover all the dues leaving a trail of unpaid debts," Modi said in his letter to banks.

He said the operations of his companies Firestar International Private Ltd (FIPL) and Firestar Diamond International Private Ltd (FDIPL) had effectively ceased owing to raids launched by investigative agencies, including the Enforcement Directorate and the Central Bureau of Investigation.

4) Modi claims his companies owe only Rs 50 billion: Modi also said the dues were much less than what the bank has claimed, and that his relatives booked in the cases filed by the central agencies had nothing to do with the operations of the firms under their scanner. In a letter Modi written on February 15-16 to the Punjab National Bank management, a copy of which was accessed by news agency PTI, Modi pegged the money his companies owed to the bank at under Rs 50 billion (Rs 5,000 crore).

PNB, the second-largest state-run bank, had, on February 14, informed the exchanges about detecting a $1.77-billion fraud at its Brady House branch in Mumbai, and named the firms led by Modi and his uncle Choksi's Gitanjali Group, and some other diamond and jewellery merchants, as suspects.

Central government agencies, the CBI and the Enforcement Directorate, have registered cases on the complaint by the bank, and launched nationwide searches on dozens of offices and residences of the alleged fraudsters. The bank has named Modi's brother, his American wife Ami, and uncle Choksi, besides some others, in the FIR.

On the over Rs 110-billion (Rs 11,000-crore) loss claimed by PNB in its FIR, Modi said, "As you are aware, this is entirely incorrect and the liability of the Nirav Modi Group is substantially less...."

"The erroneously cited liability resulted in a media frenzy which led to immediate search-and-seizure operations, and which in turn resulted in Firestar International and Firestar Diamond International effectively ceasing to be going concerns," his letter said.

5) Modi wants banks to pay his employees' salaries: Nirav Modi has asked the banks to pay salaries to the 2,200 employees working in those firms. "I would request you to permit salaries for FIPL and FDIPL to be paid for the 2,200 employees from the balance lying in the current accounts. Our HR head will send you a breakup of the monthly salary," Modi, who left the country along with his family in the first week of January, before the alleged scam became public, wrote in the letter.

6) Modi wants to sell his firms: Nirav Modi requested banks to allow him to sell the Firestar group. "Even after your complaint was filed, in good faith I wrote to you saying please sell/allow me to sell Firestar Group, or their valuable assets, and recover the dues not just from Firestar Group, but also from the three firms," Modi's letter said.

He said the inventory, including assets and receivables of FIPL and FDIPL and three other firms could have settled the pending dues to the banks. "However, now that stage appears to have passed, and there is a general panic," he said, adding that the valuation of the firms stood at Rs 65 billion.

7) There has been no default: He went on to state that PNB had time and again acknowledged that the buyer's credit facility had been extended by it to the three partnership firms for several years, and that there had been no default on the part of any of these firms over all these years.

He said that money went through PNB all these years for the repayments of the advances given by the overseas bank branches under the buyer's credit.

"That Firestar International and Firestar Diamond International have never been in default to any bank, and the bankers are fully secured". He also said that PNB had over the years been earning bank charges to the tune of billions of rupees on the buyer's credit facility extended by the bank to the three partnership firms. He added that PNB had extended the money to the firm's buyers as well, from where also it has been receiving full payments, with interest and on time, all these years.

8) Govt seeks RBI's view on lapses in banking system: The Union government has shot off a letter to the RBI on the alleged Rs 114-billion PNB scam, asking whether at any stage the banking regulator had detected the fraud, involving LoUs issued to foreign branches of Indian banks on behalf of Nirav Modi and Choksi companies.

"Under the Banking Regulation Act, the RBI has a major role related to inspection, regulation, audit and the oversight of banks. We have written to the RBI, asking how the alleged scam, which had been going on for years, went undetected, and whether the regulator exercised its role under the law," an official said on condition of anonymity.

9) Three more PNB officials arrested: The CBI on Monday arrested three more PNB officials after intense grilling during the day in connection with the scam involving billionaire jewellery merchants Nirav Modi and Mehul Choksi, officials said. The agency also started searches late Monday evening at group offices of Nirav Modi at Peninsula Business Park in lower Parel, Mumbai.

The total number of arrests by the CBI has risen to five -- four PNB officials and a retired employee of the bank -- after Monday's development.

Manoj Kharat, a single-window operator at PNB, and the retired employee Gokulnath Shetty were arrested earlier.
Bechhu Tiwari, the then chief manager in the forex department; Yashwant Joshi, Scale-II manager in the forex department; and Praful Sawant, Scale-I officer handling the exports section were arrested by the agency Monday evening, officials said. The agency had started searches at their residences located in Navi Mumbai, Andheri and Dombivilli, they said.

10) 'PNB solely liable for fraud': The public sector banks (PSBs) affected by fraudulent LoUs issued by PNB have told the government that PNB is wholly responsible for the alleged Rs 114-billion scam related to the groups of companies led by Nirav Modi and Mehul Choksi.

A senior banker disputed the claim made by PNB that the fraud went undetected because the bank's core banking system (CBS) was not integrated with the Society for Worldwide Inter-Bank Financial Telecommunication (SWIFT), a global financial messaging system that was used to instruct foreign branches of Indian banks to release money, amounting to Rs 114 billion over the years, for companies owned by Nirav Modi and Mehul Choksi. The executive also said all the LoUs issued by PNB were genuine and in accordance with norms set out by the RBI.

"Once our foreign branches transferred the money to the PNB's nostro account how can it claim that the transaction was not recorded in its books? It should reflect in its accounts," the banker said on condition of anonymity.