How Blockchain could have averted Biggest Banking Scam in India


The views in this article are purely mine. After ranting for about a couple of paragraphs, I’ll suggest how blockchain technology has the power to avoid such scams.


This article is in connection with the largest banking scam that sprung up in my country India very recently. A businessman, NiravModi looted an entire national bank (Punjab National Bank) alleged worth ₹11,400 Crore INR ($1.8 bn).

₹ 11,40,00,00,00,000. Let it sink in.

  • Punjab National Bank (PNB) is India’s second largest public lender.
  • Recently Government of India (GoI) granted about ₹6,000 crore to help the bank cover its non-performing assets problem. PNB’s entire market capitalisation when the scam occurred was ₹33,000 crore.
  • ₹11,400 crore = 8.5 x (PNB’s profit for financial year 2016–2017)


Presently, the matter has turned political. Bharatiya Janta Party (BJP) is accusing Congress Party and vice versa. The blame game is quite a tradition in Indian politics. It happens every time. They call it chai par charcha (Tea Talk).


You see, the GoI is prolly sitting with popcorn and enjoying the fest.

What is Nirav Modi getting framed for?

Basically, a junior level Mumbai branch official issued Letters of Undertakings wrongfully on behalf of companies associated with Nirav Modi. What Letters of Undertaking do is that they empower companies to get buyer credit (loan) from foreign Indian banks to import material into India. So this Nirav guy got loan in foreign currency WITHOUT any collateral. And this money was NEVER used to import goods in India. Rather Nirav used to repay loans from other banks!

How did this go unnoticed up until now when it had been going on since 2011?

So when the junior level official sent the instructions to foreign banks, it was done via messaging system known as (SWIFT) Society for Worldwide Interbank Financial Telecommunication. This system is de facto trusted by all the banks over the world without any question. Why? Because it is endorsed by supervisors before instructions are issued.

The turning point:

These instructions were NOT logged on PNB’s core banking system. Infosysbacks up the technology of PNB’s banking and financial system.

This meant that the instructions, essentially promises to other banks that Punjab National Bank would pay them back for credit extended to Nirav Modi, were not noticed by the PNB management.

So how did the bank figure it out?

When Nirav Modi’s companies again sought Letter of Undertaking, they were asked to provide 110% cash margin as security. Nirav Modi’s companies told the bank that they had been availing the facility of Letter of Undertaking without providing any cash margin since several years.


The bank then went through the SWIFT trails to examine what actually had been going on in the branch, and that is when the scam emerged.

So who the hell pays for this mess?

Right now, the pressure is on other foreign Indian banks who lent the money and not PNB. But those banks are not at fault because they doled out money based on SWIFT instructions.

Allahabad Bank, which is believed to have the largest exposure here, has said that its liabilities are with Punjab National Bank and not the individual companies, and so it expects the bank to pay up and does not have to worry about collecting money from Modi’s companies.

There is no straight answer to above question, but ultimately its the common man which has to suffer.


Blockchain Solution

I think I’ve cribbed enough. Now let’s talk about the solutions.

Key features that gave rise to the scam:

  1. Junior official sending out Letter of Undertaking without any authority: In blockchain, there are smart contracts which will not get executed until specified people have not nodded. For eg, if I say that to sell my house, me and my parents have to agree. So the house won’t get sold if ONLY I agree OR if ONLY my parents agree. The condition is that BOTH of us have to agree.
  2. Bank issued Letter of Undertaking without any security: There was no security kept from Nirav Modi before lending the loan which is TOTALLY against bank’s policies. Here also concept of smart contracts can fit in. Loan will not get approved until and unless securities from the person who is taking the loan are successfully deposited.
  3. None of the transactions got logged on PNB’s banking system: There is a centralised database which has to updated specifically by the bank manually. There are “chances” of manual error. In blockchain, there is only ONE ledger which is ultimate truth. There is no scope of manual error, foul play there.

If I’m missing out on any point in the solution, please comment it below. It’ll be appreciated.

I hope GoI focuses on solutions rather than blaming each other. India needs to rise above all this mess. It is one of the oldest countries in the history of the world yet it is still developing. There has to be a problem. As a citizen of India, I do take pride in my nation. But such incidences where our government and leaders are incompetent, bog me down.

That’s all.

How Blockchain could have averted Biggest Banking Scam in India was originally published in Hacker Noon on Medium, where people are continuing the conversation by highlighting and responding to this story.

Posted by Niharika Singh on February 17, 2018 @—-3a8144eabfe3—4

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