As expected, media is crying as if Rs 11500 crores have been lost by PNB. Congress as expected is talking as if it is not Nirav Modi who is in question but Mr Narendra Modi himself. Both may be excused for their ignorance and need for TRP.
However, I am surprised that RBI has come out with a statement which is in my opinion legally incorrect.
Normally when letters of guarantee are issued, they are issued on stamped papers and with an understanding that the beneficiary will be “Paid without demur”. RBI is therefore saying that PNB should pay all the liabilities without contesting.
However , PNB Chairman has rightly stated in his press conference that the bank would repay only bonafide claims.
I fully agree with the contention of PNB that they should not make payment blindly to anybody who makes a claim as beneficiary of the guarantee. They should challenge the claim since there is a “Notice of Defective Title” to the beneficiary and PNB is bound to exercise caution.
In this case, the lenders are supposed to have financed some valid business proposition with the letter of comfort as a collateral security. No Bank is supposed to treat a letter of guarantee as just an endorsement of a cheque and make payment just like that. If after this the venture fails for some reason and the cause of action for which the letter of guarantee was issued arises, then only the guarantee can be invoked and the issuing Bank is obliged to pay.
If the beneficiary is Nirav Modi’s own firm or there are other reasons for which the transaction for which the lender disbursed money was not justifiable for business purposes, then the transaction is prima facie suspect and the beneficiary himself can be considered as an accomplice to defraud PNB.
The forged letter of undertaking should be considered as a “Nullity” and not an “Authorized instrument that can create liability”.
If PNB can prove that the beneficiary had reasons to believe that the transaction is suspicious, then PNB would not be liable to pay.
Share holders of PNB should therefore object to RBI’s instructions which is meant to protect the other Banks which actually had a direct contractual relationship with Nirav Modi’s beneficiaries while PNB itself is a victim of the fraud committed by its own officers.
We can accuse PNB of negligence but it is for another day and for another argument . It does not give license to other banks to accommodate Nirav Modi beyond his genuine business requirements and claim protection under the guarantee. The Guarantee would be valid if the beneficiary had taken the decision to lend as if there was no collateral in the form of the guarantee.
Further PNB should immediately revoke its guarantee and if there is any claim by any beneficiary, the beneficiaries may be asked to raise their claims with full particulars of how the lending decision was taken. It can then evaluate genuineness of the claims and decide the course of action.
At this point of time we donot have the actual text of the document and hence we donot know whether it was transferable and could be discounted with secondary lenders or whether any transfer was required to be registered with the PNB, whether there was a time limit for validity and the claim, etc.
I suppose the press will get these details shortly but RBI should let PNB handle its liability without jumping in to protect other Banks like Allahabad Bank or State Bank of India.
If the liability gets divided with 30 Banks it may be fine. No single Bank will take a big hit. In future RBI should insist that the beneficiary should register his claim within a reasonable time after the guarantee letter is submitted to him and that would avoid situations like this.
The Swift system should provide for digital signature of such transactions and the digital signing should be registered automatically in the Core Banking System so that frauds like this cannot happen. Finacle as a CBS software should integrate the Swift messages with the CBS so that every SWIFT message is generated from within the Finacle system and duly recorded for audit at the Central office level
Since it is stated that more than Rs 6500 cores worth assets have already been confiscated, and the lenders will have additional securities available to them, a substantial part of the actual losses may be fully recovered.
Hence neither RBI nor the media need to sensationalize this scam. The officials however need to be punished for the fraud.