If PNB won’t lend to Nirav Modi, how will he repay PNB?

Banking Ombudsman answers queries on LIBOR, Nostro and other joke words that bankers use

Chennai, Feb 22: When it emerged that jeweller Nirav Modi and his company had cheated the State-owned Punjab National Bank to the tune of Rs. 11, 400 crore using fake LoUs (Letters of Understanding), the news certainly raised several uncomfortable questions, chief of which was what the heck are these LoUs.

One of the things about high-profile banking crimes is that they involve, apart from conniving officials, hell a lot of jargon that are hard to penetrate. In general, there are a lot of stuff about banking that people have very little idea about (do you know that as per the latest guidelines of the RBI that if your ATM password is not a combination of your first secret girlfriend’s birth date then  you are liable for a service charge?)

In the event, we got in touch an ombudsman, a top banking post with the most ludicrous job name, to answer your various queries on banking and on the Nirav Modi scandal. (Ombudsman is, by the way, Swedish for “nobody knows what my actual job is”.)

Q: What is an LoU?

Ans:  LoU was originally LoC. Since there is continuous shelling and gun firing happening at LoC, they changed it to LoU.

Okay, Letter of Understanding used to be called Letter of Comfort (LoC), and it is basically a guarantee that A Bank gives to B Bank for a loan that a businessman has taken from B Bank. Now you may wonder why A Bank itself does not directly extend the credit to the businessman, and instead stands guarantee for the loan that the businessman is taking from Bank B.  You ask this question because you are sane and logical. But nobody in the banking industry is that, so the businessman keeps taking credit from B Bank while A Bank keeps standing guarantee for the same.

But when the businessman does not repay B Bank, it does the inevitiable:  it takes our money. Seriously, it gets the money from A Bank, which is basically funded by tax-payers like you and I.

Nirav Modi is the businessman in this case. A Bank is Punjab National Bank. B Bank is many other banks. And you and I are, unfortunately, you and I only.

Q: Can you give the nitty-gritty of Nirav Modi case?

Ans: It is a simple case of how an innocent and honest business person has been hounded by a draconian system.

To put it in simple understandable terms, Nirav Modi owed PNB some money and so he resorted to the logical and the most reasonable method of borrowing more money from PNB to pay off his original debt.

And to pay off the new borrowal, he got more money from the bank he has done good business with, the PNB. This reasonable setup kept on going for years after years, when one fine day, the PNB, in a strange decision, said that it was not going to give Nirav Modi any more money and he also better pay up what he had borrowed till then. How stupid can the PNB? If PNB did not lend money to Nirav Modi where on earth is he going to find money to repay  PNB? That is where things stand now.

Q: What was the RBI doing all along when the scam amount was burgeoning to over Rs.11,000 crore?

Ans: To be fair, all its officers, right up to the level of Deputy Governor, were busy counting the money collected during demonetisation.  The task of money counting has been so humongous that the RBI doesn’t even have the staff to keep a tab  on the inflation numbers anymore. Somebody should check on it whether inflation is around or has slipped surreptitiously to Madagascar or some such place.

Q: In Nirav Modi’s case terms like “LIBOR”, “Nostro account”, “SWIFT” are bandied about. What are they?

Ans: These are important foreign bank-related terms that we frankly think have been just made up to give off the sense that they are important. But we know better.

LIBOR is the abbreviation of London Inter Bank Offered Rate, and it is the rate at which banks borrow money from each other. It is important for men, who always wear dark blue coats and sit in front of computers that shows some graph and who also use words like swaption, overnight indexed swaps. These men have no friends in life.

But why London, why not New Delhi or New York, you may wonder. London was chosen based on the common sense logic that NDIBOR or NYIBOR does not have the easy ring that LIBOR has.

Nostro, essentially,  is the account that a local bank has in a foreign bank. All Nostro accounts, as is the norm, have to be linked to Aadhaar by March 31.

SWIFT is a sub-compact car produced by Maruti Suzuki. Oops, wrong cut and paste. SWIFT is Society for Worldwide Interbank Financial Telecommunication code.  In other words, it is OTP for international wire transfers between banks.

Q: Finally, did Modi really photo-bomb at Davos?

Ans: Considering that it was about photos, we are sure he went and eagerly posed.  But we are not sure which Modi it was really.