“Recent financial frauds in India

and their effects on Indian

financial system – With reference
to The Punjab National Bank
Scam ”

BY- YASHESH BHANSALI

MBA (FINANCE)
DR. D.Y.PATIL INSTITUTE OF MANAGEMENT AND RESEARCH,
PIMPRI , PUNE .
 Literature review
1)
-Ashutosh Kolte* Assistant Professor,Department of Management Sciences,
(PUMBA), Savitribai Phule Pune University,Paresh Wagh
Tata AIG General insurance Company, Pune.
 The Punjab National Bank (PNB) lost $1.77 billion in Nirav Modi case. The magnitude
of the scam is very huge. This puts serious questions regarding how the scam took place
either due to combination of external & internal processes or some other reasons, the
technicalities behind the scam related to SWIFT, CBS, auditing etc. and the extent
of scam impact as whole have been found out in this paper. The RBI is facing questions
from the public regarding why it did not able to detect the banking scam during the
auditing. The causes of this big scam with technical base and the scam impact have been
found out. Now, this is the time where all Public Sector Banks (PSBs) should learn
from such types of happenings. In this paper, the identification of the scam & its
analysis is carried out. This paper also focuses on the failure of the audit and internal
processes and practices that caused the scam.
2)
Gayathri and 2T. Mangaiyarkarasi 1School of Management Studies, VISTAS,
Pallavaram, Chennai. gayathriphd@gmail.com 2School of Management Studies,
VISTAS, Pallavaram, Chennai
 
 At a time when the government is aiming for bank recapitalization, the PNB scam comes
as a huge blow to the entire banking sector. The Rs 12,700 crore scam involves at least
six banks, raising doubts over the internal safety of operations in financial firms. It may
be noted that the PSBs lost at least Rs 227 billion to bank frauds in the last five years.
The magnitude of PNB scam is very exorbitant and it has been happening for more than
five years undetected. This poses serious questions into the internal operations and
auditing processes. The apex bank of the country RBI is facing public wrath for not being
able to detect the largest banking scam. It is high time that all PSBs should review their
internal process and take appropriate actions. This paper aims to identify and analyze the
factors that led to this massive scam. It uses the quality tool 5W2H for analysis. This
paper also delves into auditing process of the banks and possible loop-holes that led to
the fraud. This paper also summarizes the impact of scam on various banks and the
economy as whole.
3)
Sasmita Mohanty
PhD Student, Marketing and StrategyDepartment of Economics, Management
and Industrial EngineeringUniversity of Aveiro, Portugal
 https://www.academia.edu/37301466/On_the_Recent_Scams_and_Frauds_in_Ind
ian_Banking_System
 The Case of PNB and Nirav ModiThese days it is the most highlighted case of
banking fraud. Nirav Modi was a noted diamondmerchant of India and he had a
good influence over several financial organizations. Panjab NationalBank (PNB),
a public sector bank was one of them. The upper management of the PNB were in
good business relations with Nirav Modi. He exploited the situation and borrowed
large amount of loansfrom PNB. However, later it was found that Nirav Modi has
cheated PNB in several forms. This yearPNB faced a big loss due to this
fraudulent deal and its top management is under scrutiny as a part ofthe fraud
investigation. PNB has lost credibility among several investors and its turnover
has comedown drastically. The amount of the fraud is estimated to be around
12,000 crore Indian Rupees (RBI2018
4)
Charan Singh RBI Chair Professor Economics & Social Science Indian Institute
of Management Bangalore Bannerghatta Road, Bangalore – 5600 76

 In recent years, instances of financial fraud have regularly been reported in India.
Although banking frauds in India have often been treated as cost of doing
business, post liberalization the frequency, complexity and cost of banking frauds
have increased manifold resulting in a very serious cause of concern for
regulators, such as the Reserve Bank of India (RBI). RBI, the regulator of banks
in India, defines fraud as “A deliberate act of omission or commission by any
person, carried out in the course of a banking transaction or in the books of
accounts maintained manually or under computer system in banks, resulting into
wrongful gain to any person for a temporary period or otherwise, with or without
any monetary loss to the bank”.
5)
Serah Sudhin Assistant Professor, New Horizon College, Marathalli, Bangalore,
India
 Banking is a sacred institution that promises to uphold the trust of the common
man in its workings and intentions. No Bank is primed to fail when the ‘Books of
Accounts’ are crystal clear and its operations are open to scrutiny and moral audit.
However, a ‘Bank’ is said to destroy the edifice of the trust in the very economy
when it encourages underhand dealings with the help of covert accomplices who
are high and mighty, perhaps government officials. The fraud is not merely a
financial loss, but a stain on the records of the institution and upon the every
mechanism that enables it to coherently represent the voice of the people. In this
paper, we are going to delve into the unrighteous nexus that was exposed only
after the act was beyond remedy. The Bank in question is the ‘Punjab National
Bank’ which will be ever remembered in history for this one scandalous deed.
Remember: The word ‘Bank’ in itself is synonymous with
trust/reliability/promise.
Need for the Study:

 To understand the banking frauds and their effects on Indian financial system with
reference to PNB fraud case.
 Objectives
 To study the recent banking frauds in India – With reference to The Punjab
National Bank Scam.

 To analyze the effects of PNB scam on Indian banking system.

 To understand the measures taken by Indian government to avoid these type of

frauds in future.
Research Definition:
 the systematic investigation into and study of materials and
sources in order to establish facts and reach new conclusions.

There are several types of research they are:-

 Applied research
 Basic research
 Correlational research
 Descriptive research
 Experimental research
 Exploratory research
Research methodology

Sr.no. Content Description

1 Type of research descriptive

2 Nature of Research Qualitative

3 Sample Size 1 case

4 Source of Data Secondary Data

Collection
 Scope of the Study:

 The study includes critical analysis of Punjab National Bank fraud case and
extends to its impact on Indian banking system.
 Data collection

 Secondary Data:-
The data is collected from some research paper, journals, articles and
internet.
 Data Analysis
Analyzing objective 1

 Bank frauds, general economic offences such as forgery and cheating are on the rise,
shows data from the National Crime Records Bureau and RBI.Economic crimes are
dangerous as their damage can extend far beyond the immediate losses or victims
 One of the recent such bank fraud is the Punjab National Bank Scam. The Punjab
National Bank Fraud Case relates to fraudulent letter of undertaking
worth ₹11,356.84 crore (US$ 1.4 billion) issued by the PNB at its Brady House
branch in Fort, Mumbai; making Punjab National Bank liable for the amount. The
fraud was allegedly organized by jeweller and designer Nirav Modi. Nirav, his wife
Ami Modi, brother Nishal Modi and uncle Mehul Choksi, all partners of the firms,
M/s Diamond R US, M/s Solar Exports and M/s Stellar Diamonds; along with PNB
officials and employees, and directors of Nirav Modi and Mehul Choksi's firms have
all been named in a chargesheet by the CBI. Nirav Modi and his family absconded
in early 2018, days before the news of the scam broke in India.
 The bank initially said that two of its employees at the branch were involved in
the scam, as the bank's core banking system was bypassed when the corrupt
employees issued LOUs to overseas branches of other Indian banks,
including Allahabad Bank, Axis Bank, and Union Bank of India, using the
international financial communication system, SWIFT. The transactions were
noticed by a new employee of the bank. The bank then complained to the CBI,
who is currently investigating the scam apart from ED and [[Reserve bank of I
ndia]]. On a later date, CBI named key officials Usha Ananthasubramanian,
former CEO of PNB, executive directors KV Brahmaji Rao and Sanjiv Sharan in
a chargesheet holding them responsible for failure to implement several circular
and caution notices issued by the RBI regarding the reconciliation of SWIFT
messages and core banking systems
Analyzing objective 2

Effects of PNB scam

Impact on Stock Market
There are thirty nine listed banks in India. Share prices of the thirty-four listed banks fell
between February 12 and February 15. The sudden volatility in the prices eroded the
market cap of these Thirty four stocks by over Rs 36,380 crores. Benchmark BSE Bankex
lost 1.2 per cent. PNB eroded investor’s wealth worth Rs 8,077 crores and its stock
tanked 20.6 per cent between February 12 and February 15 2018.

Impact on banks
The value of PNBs fraudulent transactions are nearly 50 times the bank's Q3FY18 net
profit of Rs 230.11 crores. There are five banks that have been directly affected by the
fraudulent transactions [19] as they have offered credit based on the LoUs issued by
PNB. These banks are UCO bank, Allahabad Bank, Axis Bank, Union Bank of India, and
SBI. Table 1 shows the bank’s exposure to the PNB scam in crores
Sr. No. Public Sector Banks Exposure(cr)

1 UCO Bank 2635

2 Allahabad Bank 2400

3 Axis Bank 200

4 Union Bank of India 1920

5 SBI 1360
Impact on LIC
 The Rs 11,400-crore banking fraud allegedly perpetrated by companies of Nirav
Modi and Mehul Choksi that has hit Punjab National Bank along with other banks
also had its impact on another state owned entity: Life Insurance Corporation.
LIC, which is the single largest institutional investor in all these four entities has
lost nearly Rs 1,400 crore over the last three trading sessions on its investments in
these companies. As on December 31st, 2017 LIC owns 13.93 per cent shares in
PNB, 13.24 per cent shares in Union Bank of India, 13.17 per cent shares in
Allahabad Bank and 2.88 per cent shares in Gitanjali Gems as on December 31,
2017. Incidentally, LIC’s holding in all these four entities is the single largest
institutional holding and, therefore, it is the biggest loser as an investor in these
companies following the crash in share prices after the fraud came to light.
Impact on Jewellery Stocks
 Shares of Gitanjali Gems plunged up to 19 per cent post Punjab National Bank’s
declaration of nearly Rs 11,400-crore fraud. Meanwhile, some of other jewellery stocks
also witnessed a similar fate with PC Jeweller slumping 19.50 per cent to Rs 303.00,
Tribhovandas Bhimji Zaveri (TBZ) 4.32 per cent to Rs 110.60, and Thangamayil
Jewellery 2 per cent to 558.55 on BSE. Rajesh Exports fell 1.34 per cent to a low of Rs
808.70 on the BSE.
Impact on PNB Rating
 Global credit rating agencies are reviewing the ratings of Punjab National Bank for a
possible downgrade in light of the massive fraud on the bank which came to light on
Wednesday. Moody’s and Fitch have raised doubts on the Punjab National Bank’s
creditworthiness and have placed the bank under rating watch, a kind of scrutiny before
a possible rating downgrade or a cut in outlook. Moody's Investors Service [17] has put
under review for a downgrade of PNB’s local and foreign currency deposit rating of
Baa3/P-3 and foreign currency issuer rating Baa3. Moody’s in a release has stated that
the likely financial impact of the fraudulent transactions is the key driver for the review
for downgrade. The primary driver the rating action being the risk of weakening of the
bank's standalone credit profile, as a result of the discovery of a number of fraudulent
transactions.” government’s recapitalization.
Analyzing objective 3

Action Taken By Indian Government:

 “Nobody seems to be talking about what precisely needs to be done. This is

important because the scam clearly shows that supervisory process at public
sector banks failed to detect the fraud and, hence, it needs to be improved," said
Abizer Diwanji, partner and national leader (financial services) at EY India.
 On Monday, 19 February, when a Mint Asia reporter visited the Brady House
branch, the branch that was at the epicentre of the PNB fraud, bore the look of a
makeshift jail, with shutters down and the branch sealed. The Brady House branch
that exclusively serves mid-sized corporates barred entry to customers, while 
inside, officials from the Central Bureau of Investigation (CBI), India's federal
detective agency, pored over papers and questioned bank officials.
 On 1 February, CBI had registered a case against Modi and some related entities for allegedly
cheating PNB of ₹ 280 crore through unauthorized transactions. The bank had said at that
time that it was investigating further to see whether there were more such transactions.
The ₹ 80 crore turned out to be just the tip of an iceberg.
 PNB’s complaint to CBI named two bank officials—Gokulnath Shetty, a deputy manager in
its foreign exchange department; and Manoj Kharat, who operated the financial messaging
system SWIFT. Both have since been arrested
 On 1 March 2018, the government approved the Fugitive Economic Offenders Bill to deter
economic offenders from evading the process of Indian law by giving powers to the
government to confiscate assets of a fugitive, including Benami assets of absconding loan
defaulters. The bill covers a wide range of economic offenders which include: loan
defaulters, fraudsters, individuals who violate laws governing taxes, black money, benami
properties, financial sector, and corruption. On 12 March 2018, the government introduced
the bill in the Lok Sabha
 n March 2018, the Reserve Bank of India scrapped banking instruments such as the Letter of
understanding (LoU) and Letter of Comfort (LoC) that in an attempt to plug a loophole and
improve banks’ due diligence in trade credit. Some bankers said that LoUs and LoCs led to
receiving banks depending completely on the issuing bank on creditworthiness
 Conclusion
 The Punjab National Bank fraud has exposed many banks to credit risk. There is a
need to investigate how the process got diluted, and how a few employees in
connivance with clients could lead to a fraud of large amounts of money for such a
long time without raising any red flags .In the PNB case, the process of checking a
transaction before disbursing a non-funded loan was not robust enough. The risk
management system of the bank should be improved.
 The bank had been constantly hit by frauds which indicates the internal risk
management is very fragile and non-planned. Monetary loss could be prevented with
proactive follow-up with the concerned paying/intermediary banks, the incident has
reinforced the fact that the various stakeholders have not learnt the lesson yet.
 Massive capital infusion through recapitalization bonds is intended to resurrect the
public-sector banks (PSBs) that are burdened by a huge pile of non-performing
assets(NPAs) and low capital adequacy. The government may have to rework its
capital infusion plan in the light of these frauds.
 Work Plan (Chapter
 Scheme)
Title page
 Certificate from Guide
 Abstract
 Chapter 1: Preamble
 1.1 Introduction
 1.2 Objectives
 1.3 Importance & Scope of the Study
 Chapter 2:
 Chapter 3: Literature Review
 Chapter 4: Data Collection and Analysis
 Chapter 5: Results and Discussion
 Chapter 6: Recommendations
 6.1 Summary of suggestions
 6.2 Limitations
 6.3 Scope for further work
 Chapter 7: Bibliography Appendix Acknowledgement