The simplest explanation of what is the PNB fraud of 11400 crores

The fraud committed in Punjab National Bank (PNB) is similar to other frauds i.e. the acts of deceiving for financial gain.

Let us take a simple example.

You write an examination or the test.

Your answer books are checked and thereafter, you get marks based on your performance.

Thereafter, a mark-sheet is issued by the examiner of the school as a certificate or a proof of your marks.

The marks mentioned in the mark-sheet should be equal to your score in the examination.

If the mark sheet is issued by the proper authority, the whole world believes it to be a Certificate of the performance in the test of the person.

If the examiner issues the mark-sheet of excellent marks, without the person appearing in the examination or different from the actual score, it is a case of fraud.

In the same way, banks issues a Letter of Credit (LOC) or a Letter of Undertaking (LOU) to a person or bank for imports of the goods after keeping a security of the equal amount.

A Letter of Undertaking (LOU) in thus bank guarantee issued by an Indian bank against which overseas bank provide finance. It is an inter-bank document.

This is required because in case the importer refuses to pay to the suppliers, suppliers would have to follow along proceeding in the importing country to recover the money as the courts of their country would have no jurisdiction in the importing country.

Banks’ interest is secured in advance because they already keep the security of equal amount before the issue of LOC and they also charge a commission/fee for issue of LOC.

In the case of PNB, the LOU was issued to importers and other banks without actually keeping the security.

It means that PNB has to pay money to the importer and other banks whenever they demand, but they have nothing to recover the money from.

Credit: (Awdhesh Singh)


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