Chapter-4 Impact of Frauds On The Performance of Banks in India

CHAPTER-4
IMPACT OF FRAUDS ON THE

PERFORMANCE OF BANKS
IN INDIA
CHAPTER-4
IMPACT OF FRAUDS ON THE
PERFORMANCE OF BANKS IN INDIA
4.1 INTRODUCTION 121-122

4.2 DESCRIPTIVE STATISTICS 122-127
4.3 TESTING OF ASSUMPTIONS 127
4.3.1 NORMALITY TEST 127-130
4.3.2 SERIAL
CORRELATION/AUTOCORRELATION TEST OF 130
RESIDUALS
4.3.3 HETEROSCEDASTICITY TEST OF
131
RESIDUALS
4.4 ANALYSIS AND INTERPRETATIONS 131
4.4.1 CORRELATION MATRICES 131-136
4.4.2 IMPACT OF FRAUDS ON THE
PERFORMANCE OF INDIAN BANKING 136-143
SECTOR
143-150
PERFORMANCE OF PUBLIC SECTOR BANKS
150-160
PERFORMANCE OF PRIVATE SECTOR BANKS
4.5 CONCLUSION 160
Chapter 4 - Impact of Frauds on the Performance of Banks in India
CHAPTER 4
IMPACT OF FRAUDS ON THE PERFORMANCE

OF BANKS IN INDIA
4.1 INTRODUCTION
This chapter deals with the analysis and interpretation of the impact of frauds
on the performance of banks in India. While analysing the impact of frauds on
performance of banks, Frequency/Numbers of Frauds (NOF) and Severity/Amount
of Frauds (AOF) are taken as independent variable and diverse components of
performance viz. Net Profit (NP), Return on Return on Assets (ROA), Return on
Equity (ROE), Return on Investment (ROI), Return on Advances (ROAd.) and Net
Interest Margin (NIM) are considered as dependent variable in different framework
of models. The sample of the study comprised of public sector banks, private sector
banks and foreign banks. But due to unavailability of data of foreign banks and in
order to maintain the consistency in the analysis, the final sample consists of 26
public sector and 19 private sector banks. These banks are selected as a sample
because sector witnessed the mergers of banks during the study period and data is
available for the whole study period only for selected sample banks. The data is
collected from the data base of Reserve Bank of India (RBI), Centre for Monitoring
Indian Economy (CMIE), website of India statistics and annual reports of sample
public and private sector banks. In order to analyze the impact of frauds on the
performance of banks, the study period of 11 years starting from 2005-06 to 2015-16
is considered. The reason of selection of 2005 as base year lies in the fact that it is
exclusive year in which first master circular was issued by the RBI providing the
guidelines and instructions to the bank on the procedure to be followed in dealing
with banks’ frauds.
The hypotheses are tested with the statistical technique i.e. panel regression,
as the collected data has the characteristics of panel and fixed and random effect
model are applied on the basis of their applicability. The application of Hausman
test is made to select between the fixed and random effect model. For the testing of
hypothesis through panel regression model, the assumptions of Normal distribution;
Residuals should not be serially correlated/ auto correlated; Residuals should not be
121
heteroscedastic are tested. To have meaningful inference, the chapter is divided into
three parts: First part deals with the analysis and interpretation of impact of
frequency and severity of frauds on the performance of Indian banking sector as a
whole; Second part deals the analysis and interpretation of impact of frequency and
severity of frauds on the performance of its different classification viz. public sector;
Third part deals with the analysis and interpretation of impact of frequency and
severity of frauds on the performance of its different classification viz. private
sector.
4.2 DESCRIPTIVE STATISTICS

The descriptive statistics of the variables under consideration is computed for
the Indian banking sector as a whole and for its classification viz. public sector and
private sector individually. The descriptive statistics is shown here under:
Table 4.1: Descriptive Statistics

Variables Mean Median Std. Deviation Maximum Minimum
Entire Banking Sector
NOF 5996.36 9061.12 5292.77 18554 2981
AOF 6585.19 3216.24 5652.26 18569.4 1003.97
NP 2578.15 996.376 5254.47 32612.3 -14433.8
ROA 1.8199 2.025 1.19575 3.8 -3.26
ROE 25.5693 28.525 18.444 55.66 -70.1
ROI 14.5608 14.515 1.61835 19.4 6.78
ROAd 20.9701 21.25 2.41437 27.5 12.87
NIM 5.5503 5.515 1.31842 4.98 5.85
Public Sector Banks
NoF 104.84 77 109.85 784 3
AoF 188.23 62.49 317.705 2310 1
NP 1506.181 721.89 3065.36 20316.112 -14181.9
ROA 0.731 0.765 0.4788 1.67 -1.25
ROE 13.0342 14.195 8.593 30.64 -23.2
ROI 7.3555 7.345 0.8069 9.49 1.58
ROAd 9.723 9.86 1.033 12 4.81
NIM 2.5047 2.515 0.55513 3.9 0.23
122
Private Sector Banks

NoF 286.75 13 1733.29 15074 1
AoF 44.8812 7.92 117.4877 902.87 0.5
NP 1071.9731 274.486 2189.113 12296.2 -251.914
ROA 1.0889 1.26 0.71695 2.13 -2.01
ROE 12.5351 14.33 9.851 25.02 -46.9
ROI 7.2053 7.17 0.81145 9.91 5.2
ROAd 11.2471 11.39 1.38137 15.5 8.06
NIM 3.0456 3 0.76329 1.08 5.62
Source: Researcher’s own compilation
Table 4.1 shows the descriptive statistics comprise of mean, median,

standard deviation, maximum and minimum of variables under consideration for the
entire banking sector and for different classification of the banking sector viz. public
and private sector. For the banking sector as a whole the minimum Number of
Frauds (NOF) is 2981, which goes up to a maximum of 18554, with mean and
standard deviation of 5996.36 and 5292.77. The minimum value of Amount of
Frauds (AOF) is 1003.97 Cr., which goes up to a maximum of 18569.4 Cr., with
mean and standard deviation of 6585.19 and 3216.24. As far as the profitability
measures Net Profit (NP), Return on Assets (ROA), Return on Equity (ROE),
Return on Investment (ROI), Return on Advances (ROAd.), Net Interest Margin
(NIM) are concerned, the mean value is minimum in case of Return on Assets
(ROA) i.e., 1.819 followed by, Net Interest Margin (NIM), Returns on Investment,
Return on Advances (RoAd.), Return on Equity (ROE) with value 5.5503, 14.5608,
20.9701, 25.5693 respectively. At the same time highest variation is found in the NP
with the standard deviation of 5254.47 and least variation is found in the NIM with
standard deviation of 1.31842.
Alternatively, by considering the classification of banking sector viz. public

and private sector individually provided that the minimum NOF in public sector is 3
which goes up to a maximum of 784 with mean value of 104.84 and variation of
109.85. Alternatively, in private sector minimum NOF is 1 which goes up to a
maximum of 15074 with mean value of 286.75 and variation of 1733.29. The
123
minimum AOF in public sector banks is 1 Cr. Which goes upto a maximum of 2310
Cr. with mean value of 188.23 and variation of 317.705, whereas in case of private
sector banks minimum AOF is 0.5 Cr., Which goes up to a maximum of 902.87 with
mean value of 44.8812 and variation of 7.92. It shows that NOF is maximum in
private sector as compared with public sector banks, whereas AOF is maximum in
public sector banks. As far as measure of profitability are concerned the mean value
of NP, ROE, ROI (1506.181, 13.0342, and 7.3555) are more in public sector banks
and ROA, ROAd., and NIM ( 0.731, 9.723, 2.5047) are less in public sector banks in
comparison of private sector banks.
Further the NOF and AOF are considered year-wise for the study period
under consideration and are shown in the figure 4.1 and 4.2 for the entire banking
sector and for the classification of banking sector viz. public and private sector.
20000
15000
10000
5000
0
2005-06
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
2012-13
2013-14
2014-15
2015-16
NOF AOF
(Amounts of Fraud in ₹Crores)

Figure 4.1 Frequency and Severity of fraud in Indian Banking Sector
124
2005-06 2006-07
3000 3000.00
2500 2500.00
2000 2000.00
1500 1500.00
1000 1000.00
500.00
500
0.00
0
NOF AOF
NOF AOF
PUB PVT PUB PVT
2007-08 2008-09
12000 4000
10000
3000
8000
6000 2000
4000
1000
2000
0 0
NOF AOF NOF AOF
PUB PVT PUB PVT
2009-10 2010-11
16000.00 4000
14000.00 3500
12000.00 3000
10000.00 2500
8000.00 PUB 2000 PUB
6000.00 PVT 1500 PVT
4000.00 1000
2000.00 500
0.00 0
NOF AOF NOF AOF
125
2011-12 2012-13
2500 10000
2000 8000
1500 6000
PUB PUB
1000 PVT 4000 PVT
500 2000
0 0
NOF AOF NOF AOF
2013-14 2014-15
8000 20000
7000
6000 15000
5000
4000 PUB 10000 PUB
3000 PVT PVT
2000 5000
1000
0 0
NOF AOF NOF AOF
2015-16
12000
10000
8000
PUB
6000
PVT
4000
2000
0
NOF AOF
Source: Researcher’s own Compilation (Amounts of Fraud in ₹Crores)

Figure 4.2: Frequency and Severity of fraud in Public and Private Sector Banks
126
The figure 4.1 depicts the severity and frequency of fraud in public and
private sector banks during study period. It shows that the minimum NOF and AOF
were in the year 2005-06. On the other hand maximum NOF was in 2009-10 and
AOF was in 2014-15. It shows for the initial period of study under consideration the
minimum NOF and AOF are noticed in the banking sector as whole but gradually
increase found in both. Further, the figure shows that the maximum NOF cannot be
associated with the maximum AOF. Even if the NOF is less, the AOF can be high or
vice-versa as shown 2009-10 and 2014-15.
The figure 4.2 provides the year-wise information of NOF and AOF in the
public and private sector for the study period under consideration. It shows that NOF
are more in Public sector as compared to private sector banks in all the year under
except for the year 2011-12. Alternatively, the AOF is more in public sector banks
in comparison of private sector in all the year except for the year 2005-06, 2006-07.
It shows that the year-wise analysis provides that more NOF and AOF was in the
public sector banks and the year 2011-12 is the year in which NOF is noticeably
more in private sector whereas AOF is more in public sector.
4.3 TESTING OF ASSUMPTIONS

In order to analyse the impact of frauds on the performance of the Indian
banking sectors and its different classification fixed and random effect model of
panel regression is used. The application of model is contingent upon the
satisfaction of certain assumptions which has to be tested. These assumptions are
tested in this section and include:
Normality test
Serial correlation/Autocorrelation test of residuals
Heteroscedasticity test of residuals
4.3.1 Normality Test

Kolmogorov-Smirnova and Shapiro-Wilk test are employed to test normality
i.e. to check the normal distribution of variables under consideration. If the number
of observation is lie between 3 to 2000, Shapriro- Wilk test is taken into
consideration otherwise Kolmogorov-Smirnov is applied to test the normality.
127
Initially none of the variable under consideration for total bank, public sector banks
and private sector is found normal. Hence, the normality of data is resorted with the
help of transformation techniques such as log natural, log10, lag, reflect, square,
square root. The stages of transformation with the methods used are shown in the
table 4.2.
Table 4.2: Stages of Transformation and Methods Used

NOF AOF NP ROA ROE ROI ROAd NIM
Entire At level x x x x x x x x
Banking At first level (Log10) √ x x x x x x x
Sector
At second level (Log - √ x x x x x x
Natural)
At third level (Square) - - x x x √ x √
At fourth level (Square - - √ √ √ - √ -
Root)
Public At level x x x x x x x x
Sector At first level (Log √ √ x x x x X x
Banks Natural)
At second level - - x √ x x X x
(Reflect and Log10)
At third level - - x - √ x √ √
(Reflect&SquareRoot)
At fourth level - - √ - - √ - -
(Square)
Private At level x x x x x x x x
Sector At first level (Log10) x √ x x x x x x
Banks
At second level x - x √ √ x x x
(Reflect and Log10)
At third level (Log x - x - - √ x √
Natural)
At fourth level √ - √ - - - √ -
(Square)
The table 4.2 shows that none of the variable under consideration was found
normal at level in the Indian Banking sector and its classification viz. public and
private sector banks.
128
Entire Banking Sector

At first level, Log 10 transformation technique was used on the all the
variables under consideration and only one variable i.e. NOF is found normal
with p-value 0.054 in Shapiro-Wilk test and for remaining variable normality
not found.
Accordingly at second level, Log natural technique was used on the variables
except NOF and only one variable i.e. AOF is found normal with p-value of
0.06 in Shapiro-Wilk test and for remaining variable normality not found.
The third level transformation with square on the variables except NOF and
AOF, provided that ROI and NIM are normal with p-value of 0.120 and 0.06
in Shapiro-Wilk test and for remaining variable normality not found.
At fourth level transformation with square root on the remaining variables
provided the normality of variables i.e. ROAd., NP, ROA and ROE where p-
value of Shapiro-Wilk test is 0.254, 0.254, 0.49. 0.054 respectively.
Public Sector Banks

At first level of transformation by Log Natural, NOF and AOF was found
normal among all variables with the p-value of 0.28 and 0.08 in case of
Shapiro-Wilk test.
In the second level of transformation on the remaining variables by Reflect
and Log 10 transformation, ROA was found normal where the p-value of
Shapiro-Wilk test is 0.051.
At the third level of transformation, ROE, NIM and ROAd. found normal by
Square root transformation with the p- value of Shapiro-Wilk test is 0.056,
0.051, 0.07.
The Square transformation was used on the remaining variables i.e. ROI and
NP and both these are found normal with p- value of Shapiro-Wilk test was
0.06 and 0.07 respectively.
Private Sector Banks

At first level of transformation with Log 10 only AOF is found normal with
the p-value of Shapiro-Wilk test is 0.12.
129
At second level transformation by Reflect and Log 10 on the remaining

variables, ROA and ROE are found normal with the p-value Shapiro-Wilk
test is 0.06 and 0.158 respectively.
The variable viz. ROI and NIM are found normal by using Log Natural
transformation at the third level of transformation where the p-value of
Shapiro-Wilk test is 0.902 and 0.233 respectively.
At fourth level transformation by using square root transformation on the
remaining variables i.e. ROAd., NOF and NP, normality of variable found
with p-value of Shapiro-Wilk test is 0.444, 0.05, 0.16 respectively.
4.3.2 Serial Correlation/Autocorrelation Test of Residuals

The Breusch-Godfrey Serial Correlation LM Test is employed to test absence
of autocorrelation in the residuals. Null hypothesis of this test is residuals of the model
are not serially or auto correlated and alternative hypothesis is residuals of the model
are serially or auto correlated. The results of test are shown in the table 4.3.
Table 4.3: Results of Autocorrelation in the Residuals
NP ROA ROE ROI ROAd. NIM
Breusch-Godfrey Serial 0.6383 0.9711 0.9203 0.3163 0.0725 0.0889

Correlation LM Test
(p-value)
The table 4.3 shows the results of autocorrelation in the residuals. For the
rejection of null hypothesis is it require that the p-value should be less that 0.05 at
5% level of significance. Here the table 4.3 shows that the p value of Net Profit is
0.6383; Return on Assets is 0.9711; Return on Equity; Return on Investment is
0.3163; Return on Advances is 0.0725 and Net Interest Margin is 0.0889 which are
more than 0.05, therefore null hypothesis of this test i.e. residuals of the model are
not serially correlated or auto correlated, is accepted. Henceforth, there is no
problem serial correlation/autocorrelation of residuals.
130
4.3.3 Heteroscedasticity Test of Residuals

Breusch Pagan Godfrey test which is employed to check the
heteroscedasticity in residuals. Null hypothesis of this test is residuals of the model
are homoscedastic or not heteroscedastic and alternative hypothesis is residuals of
the model are heteroscedastic. The results of test are shown in the table 4.4
Table 4.4: Results of Heteroscedasticity Test

NP ROA ROE ROI ROAd. NIM
Breusch Pagan Godfrey 0.9796 0.7900 0.8359 0.3992 0.9796 0.3754
(p-value)
The table 4.4 shows the results of Heteroscedasticity test of residuals. For the
rejection of null hypothesis is it require that the p-value should be less that 0.05 at
5% level of significance. Here the table 4.4 shows that the p-value of Net Profit
(NP) is 0.9796; Return on Assets (ROA) is 0.7900; Return on Equity (ROE) is
0.8359; Return on Investment (ROI) is 0.3992; Return on Advance is 0.9796 and
Net Interest Margin (NIM) is 0.3754 which are more than 0.05, therefore null
hypothesis of this test i.e. residuals of the model are homoscedastic or not
heteroscedastic, is accepted and alternative hypothesis i.e. residuals of the model is
heteroscedastic is rejected.
4.4 ANALYSIS AND INTERPRETATION

4.4.1 Correlation Matrices
The coefficient of correlation shows the degree of relationship between two
variables. This table shows the correlation matrix between the variables under
consideration (dependent and independent) of Indian banking sector as a whole
during the study period. The coefficient of correlation (r) lies between -1 and +1 and
can be interpreted as:
Coefficient of Correlation (r) Degree of Correlation
Between 0.99 to 0.90 (+/-) Very High Correlation (Positive/Negative)
Between 0.75 to 0.90 (+/-) High Correlation (Positive/Negative)
Between 0.25 to 0.75 (+/-) Moderate Correlation (Positive/Negative)
Between 0.25 to 0.01 (+/-) Low Correlation (Positive/Negative)
131
The hypotheses in the correlation test are as follows:

Ho: The population coefficient of correlation is not significantly different from
zero.(p=0)
Ha: The population coefficient of correlation is significantly different from zero.
(p ≠ 0)
In this section the correlation among the variable under consideration is

measured for the entire Indian banking sector and the results are shown in the table 4.5.
Table 4.5: Correlation Matrix in Indian Banking Sector during study period
NOF AOF NP ROA ROE ROAd ROI NIM

NOF Pearson 1 .016 .146** .044** -.030** -.092* -.088** -.073**
Correlation
Sig. (2-tailed) .715 .001 .000 .000 .042 .000 .000
N 495 495 495 495 495 495 495 495
** ** ** ** ** *
AOF Pearson .016 1 .138 -.269 -.252 -.156 .108 -.153**
Correlation
Sig. (2-tailed) .000 .002 .000 .000 .000 .016 .001
N 495 495 495 495 495 495 495 495
NP Pearson .146** .138** 1 .254** .198** -.130** -.134** -.022**
Correlation
Sig. (2-tailed) .001 .002 .000 .000 .004 .003 .000
N 495 495 495 495 495 495 495 495
ROA Pearson .044** -.269** .254** 1 .862** .179** .042** .531**
Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .000 .000
N 495 495 495 495 495 495 495 495
** ** ** ** ** **
ROE Pearson -.030 -.252 .198 .862 1 .006 .040 .327**
Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .000 .000
N 495 495 495 495 495 495 495 495
ROAd Pearson -.092* -.156** -.130** .179** .006** 1 .062** .327**
Correlation
Sig. (2-tailed) .042 .000 .004 .000 .000 .001 .000
N 495 495 495 495 495 495 495 495
132
ROI Pearson -.088** .108* -.134** .042** .040** .062** 1 .309**

Correlation
Sig. (2-tailed) .000 .016 .003 .000 .000 .001 .000
N 495 495 495 495 495 495 495 495
NIM Pearson -.073** -.153** -.022** .531** .327** .327** .309** 1
Correlation
Sig. (2-tailed) .000 .001 .000 .000 .000 .000 .000
N 495 495 495 495 495 495 495 495
Note: **. Correlation is significant at the 0.01 level (2-tailed). *. Correlation is
significant at the 0.05 level (2-tailed).
It was found from the correlation matrix that Number of Fraud is positively
correlated with Amount of fraud, Net profit and ROA and negatively correlated with
ROE, ROAd, ROI and NIM while Amount of Fraud is positively correlated with Net
Profit and ROI and negatively correlated with ROA, ROE, ROAd and NIM. The
highest correlation value was found between ROA and ROE which shows the high
correlation between two variables in the India banking sector as a whole. In the
table, it was found that all the p-value of coefficient of correlation is less than 0.05
which shows the significant correlation between the variables.
Table 4.6: Correlation Matrix in Public Sector banks during study period

NOF Pearson 1 .297** .403** .075** .057** -.301** -.001** .070**
Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .000 .000
N 286 286 286 286 286 286 286 286
AOF Pearson .297** 1 .098** -.371** -.391** .024** .139* -.120*
Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .019 .042
N 286 286** 286 286 286 286 286 286
NP Pearson .403** .098 1 .265** .207** -.060** -.222** -.121*
Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .000 .040
N 286 286 286 286 286 286 286 286
133
ROA Pearson .075** -.371** .265** 1 .940** -.028** -.083** .416**

Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .000 .000
N 286 286 286 286 286 286 286 286
ROE Pearson .057** -.391** .207** .940** 1 -.030** -.086** .387**
Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .000 .000
N 286 286 286 286 286 286 286 286
ROAd Pearson -.301** .024** -.060** -.028** -.030** 1 .018** .008**
Correlation
Sig. (2-tailed) .000 .000 .000 .000 .000 .000 .000
N 286 286 286 286 286 286 286 286
ROI Pearson -.001** .139* -.222** -.083** -.086** .018** 1 .467**
Correlation
Sig. (2-tailed) .000 .019 .000 .000 .000 .000 .000
N 286 286 286 286 286 286 286 286
NIM Pearson .070** -.120* -.121* .416** .387** .008** .467** 1
Correlation
Sig. (2-tailed) .000 .042 .040 .000 .000 .000 .000
N 286 286 286 286 286 286 286 286
The table 4.6 shows the correlation matrix among the variables under
consideration (dependent and independent) of public banking sector banks during
the study period. It was depicted from the table that NOF is positively correlated
with AOF, NP, ROE and NIM whereas it is negatively correlated with ROAd and
ROI. The AOF is negatively correlated with ROA, ROE and NIM. The highest
coefficient of correlation was found between ROA and ROE which shows the very
high positive correlation. The p-value is less than 0.05 shows the coefficient of
correlation is significantly different from zero.
134
Table 4.7: Correlation Matrix in Private Sector banks during study period

NOF Pearson 1 .060** .247** .023** -.044** -.194** -.124** -.152*
Correlation
Sig. (2-tailed) .001 .000 .006 .004 .005 .003 .028
N 209 209 209 209 209 209 209 209
** ** ** ** * **
AOF Pearson .060 1 .261 .029 -.017 -.138 -.058 .060**
Correlation
Sig. (2-tailed) .001 .000 .004 .001 .047 .004 .006
N 209 209 209 209 209 209 209 209
NP Pearson .247** .261** 1 .366** .191** -.179** .006** .192**
Correlation
Sig. (2-tailed) .000 .000 .000 .006 .009 .004 .005
N 209 209 209 209 209 209 209 209
ROA Pearson .023** .029** .366** 1 .897** .073** .215** .517**
Correlation
Sig. (2-tailed) .006 .004 .000 .000 .005 .002 .000
N 209 209 209 209 209 209 209 209
** ** ** ** ** **
ROE Pearson -.044 -.017 .191 .897 1 .074 .185 .348**
Correlation
Sig. (2-tailed) .004 .001 .006 .000 .009 .007 .000
N 209 209 209 209 209 209 209 209
ROAd Pearson -.194** -.138* -.179** .073** .074** 1 .250** .272**
Correlation
Sig. (2-tailed) .005 .047 .009 .005 .009 .000 .000
N 209 209 209 209 209 209 209 209
ROI Pearson -.124** -.058** .006** .215** .185** .250** 1 .290**
Correlation
Sig. (2-tailed) .003 .004 .004 .002 .007 .000 .000
N 209 209 209 209 209 209 209 209
* ** ** ** ** ** **
NIM Pearson -.152 .060 .192 .517 .348 .272 .290 1
Correlation
Sig. (2-tailed) .028 .006 .005 .000 .000 .000 .000
N 209 209 209 209 209 209 209 209
135
The table 4.7 shows the correlation matrix between the variables under
consideration (dependent and independent) of private banking sector during the
study period. The overall result shows the rejection of null hypothesis which states
that coefficient of correlation is not significantly different from zero and acceptance
of alternate hypothesis. In this segment highest positive correlation was found
between ROA and ROE similar like banking sector as a whole and public sector.
4.4.2 Impact of frauds on the performance of Indian Banking Sector

After satisfying the necessary assumptions for the application of panel
regression, fixed effect model and random effect model are used to find out the
impact of frauds on the performance of Indian banking sector. Further, the Hausman
test is applied to select the result of best fit model among these two models. The null
hypothesis of the Hausman test states that random model is the appropriate and the
rejection of the null hypothesis leads to applicability of fixed model. While
analysing the impact of frauds both the dimension of the frauds viz. NOF and AOF
are taken into consideration and at the same time, diverse components of
performance viz. NP, ROA, ROE, ROI, ROAd. and NIM are considered to have
comprehensive evaluation of impact of frauds on the performance of Indian banking
sector. The hypothesis tested in this section and description of the model used is as:
Hypothesis 1: There is no significant impact of frequency and severity of frauds

on the performance of Indian Banking sector as a whole.
H01: Frequency and severity of frauds in the banks have no significant impact on
Net Profit (NP) of Indian Banking sector as a whole.
Return on Assets (ROA) of Indian Banking sector as a whole.
Return on Equity (ROE) of Indian Banking sector as a whole.
Return on Investment (ROI) of Indian Banking sector as a whole.
Return on Advances (ROAd.) of Indian Banking sector as a whole.
Net Interest Margin (NIM) of Indian Banking sector as a whole.
136
Description of the Models:

NP it = β0 + β1Frequency of Frauds it + β2 Severity of Frauds it+ µ it
ROA it = β0 + β1Frequency of Frauds it + β2 Severity of Frauds it+ µ it
ROE it = β0 + β1Frequency of Frauds it + β2 Severity of Frauds it+ µ it
ROI it = β0 + β1Frequency of Frauds it + β2 Severity of Frauds it+ µ it
ROAd it = β0 + β1Frequency of Frauds it + β2 Severity of Frauds it+ µ it
NIM it = β0 + β1Frequency of Frauds it + β2 Severity of Frauds it+ µ it
Where, NP= Net Profit; ROA= Return on Assets; ROE= Return on Equity;
ROI= Return on Investment; ROAd.= Return on Advances; NIM= Net Interest
Margin, β0= Constant; β1= Coefficient of Frequency of Frauds or Number of
Frauds; β2= Coefficient of severity of Frauds or Amount of Frauds; µ it = error term
for time & cross sections.
Table 4.8: Result of Panel Regression for Banking Sector

(Dependent Variable-NP)
Coefficient Standard Error P-Value

Constant (C) 325.5474 434.5704 0.4542
Number of Frauds (NOF) 597.5055 261.4547 0.0228
Amount of Frauds (AOF) 13.88468 63.17566 0.0261
F- Test 15.68053 0.000000
R2 = 0.624882
Adjusted R2 = 0.585031
Hausman Test = 0.0046, (Fixed Effect Model)
Table 4.8 shows the results of panel regression (fixed effect model), where
Net profit (NP) is taken as dependent variable. The p-value of Hausman test was
0.0046 which is less than 0.05 accordingly, null hypothesis is rejected and
alternative hypothesis, fixed effect model is best fit model is selected. The value of
R2 is 0.624882 which indicate that, 62% variation in the net profit is because of the
independent variables viz. NOF and AOF. The p-value of both NOF and AOF is less
than 0.05. Therefore it can be observed that both the independent variables, NOF
137
and AOF are significantly affecting the dependent variable, NP. The p-value of F-
Test is 0.000, which is less than 0.05 which shows joint influence of independent
variables on dependent variable leads to rejection of null hypothesis, which states
that frequency and severity of frauds in the banks have no significant impact on Net
Profit (NP) of Indian Banking sector as a whole. In other words, frequency and
severity of frauds in the banks have significant impact on net profit of the Indian
Banking sector as a whole. Following equation is derived on the basis of the result
of panel regression analysis:
NP it = 325.54 + 597.50 Frequency of Frauds it + 13.88 Severity of Frauds it
In the above equation, the value of intercept is 325.54 and coefficients of

Frequency of frauds and Severity of frauds are 597.50 and 13.88 to predict the Net
Profit (NP).

(Dependent Variable-ROA)

Constant (C) 0.975071 0.104702 0.0000
Amount of Frauds (AOF) -0.131002 0.014931 0.0000
F- Test 38.74132 0.0000
R2 = 0.539739
Hausman Test = 0.0753, (Random Effect Model)
Table 4.9 shows the results of panel regression (random effect model), where
ROA is taken as dependent variable. The p-value of Hausman test was 0.0753 which
is more than 0.05 hence the null hypothesis which states the random effect model is
a best fit model is selected. The value of R2 is 0.5397 which indicate that, 53%
variation in the ROA is because of independent variables viz. NOF and AOF. The p-
values of both the independent variables NOF and AOF are 0.000 which is less than
138
0.05. Therefore it can be observed that both the independent variables, NOF and
AOF are significantly affecting the dependent variable ROA. The p-value of F-Test
is 0.000, which is less than 0.05 which shows joint influence of independent
variables on dependent variable and leads to rejection of null hypothesis, which
states that frequency and severity of frauds in the banks have no significant impact
on ROA of the Indian banking sector as a whole. In other words, frequency and
severity of frauds in the banks have significant impact on ROA of the Indian
banking sector as a whole. Following equation is derived on the basis of the result of
panel regression analysis:
ROA it = 0.97 + 0.22 Frequency of Frauds it – 0.13 Severity of Frauds it

Frequency of frauds and Severity of frauds are + 0.22 and – 0.13 to predict the
Return on Assets (ROA).

(Dependent Variable-ROE)

Constant (C) 13.76604 1.541406 0.0000
F- Test 42.53749 0.0000
R2 = 0.651359
Hausman Test = 0.4013 (Random Effect Model)
Table 4.10 shows the results of panel regression (random effect model),
where ROE is taken as dependent variable. The p-value of Hausman test was 0.4013
which is more than 0.05. Hence the null hypothesis accepted and random effect
model is a best fit model. The value of R2 is 0.6513 which indicate that, 65%
variation in the ROE is because of independent variables NOF and AOF. The p-
139
values of both the independent variables are 0.000 which is less than 0.05. Therefore
it can be observed that both the independent variables, NOF and AOF are
significantly affecting the dependent variable ROE. The p-value of F-Test is 0.000,
which is less than 0.05 which shows joint influence of independent variables on
dependent variable leads to rejection of null hypothesis. Frequency and severity of
frauds in the banks have significant impact on ROE of the Indian banking sector as a
whole. Following equation is derived on the basis of the result of panel regression
analysis:
ROE it = 13.76 + 4.22 Frequency of Frauds it – 2.23 Severity of Frauds it

Frequency of frauds and Severity of frauds are + 4.22 and – 2.23 to predict the
Return on Equity (ROE).

(Dependent Variable-ROI)

Constant (C) 53.77019 2.098102 0.0000
Number of Frauds (NOF) -2.770714 1.179074 0.0192
F- Test 9.629671 0.000079
R2 = 0.738809
where ROI is taken as dependent variable. The p-value of Hausman test was 0.9738
which is more than 0.05. Hence the null hypothesis which states the random effect
model is a best fit model is selected. The value of R2 is 0.7388 which indicate that,
73% variation in the ROI is because of independent variables NOF and AOF. The p-
value of both the independent variables is 0.000 which is less than 0.05. Therefore it
can be observed that both the independent variables NOF and AOF are significantly
140
affecting the dependent variable ROI. The p-value of F-Test is 0.000, which is less
than 0.05 which shows joint influence of independent variables on dependent
variable leads to rejection of null hypothesis, which states that frequency and
severity of frauds in the banks have no significant impact on ROI of the Indian
banking sector as a whole. In other words, frequency and severity of frauds in the
banks have significant impact on ROI of the Indian banking sector as a whole.
Following equation is derived on the basis of the result of panel regression analysis:
ROI it = 53.77 – 2.77 Frequency of Frauds it + 1.36 Severity of Frauds it

Frequency of frauds and Severity of frauds are – 2.77 and + 1.36 to predict the
Return on Investment (ROI).

(Dependent Variable-ROAd)

Constant (C) 3.144600 0.037629 0.0000
F- Test 12.03215 0.0000
R2 = 0.561065
Return on Advances (ROAd.) is taken as dependent variable. The p-value of
Hausman test was 0.0000 which is less than 0.05. Accordingly, null hypothesis is
rejected and alternative hypothesis, fixed effect model is best fit model is selected.
The value of R2 is 0.56106 which indicate that, 56% variation in the ROAd. is
because of independent variables, NOF and AOF. The p-value of both the
independent variables is less than 0.05. Therefore it can be observed that both the
141
independent variables are significantly affecting the ROAd. dependent variable.

Therefore it can be observed that both independent variables number of fraud and
amount of fraud are significantly affecting the dependent variable ROAd.. The p-
value of F-Test is 0.000, which is less than 0.05 which shows joint influence of
independent variables on dependent variable leads to rejection of null hypothesis,
which states that frequency and severity of frauds in the banks have no significant
impact on ROAd. of the Indian banking sector as a whole. In other words, frequency
and severity of frauds in the banks have significant impact on ROAd. Following
equation is derived on the basis of the result of panel regression analysis:
ROAd it = 3.14 + 0.01 Frequency of Frauds it + 0.01 Severity of Frauds it

Frequency of frauds and Severity of frauds are + 0.01 and + 0.01 to predict the
Return on Advances (ROAd.).

(Dependent Variable-NIM)

Constant (C) 8.077747 0.589808 0.0000
F- Test 20.88800 0.0000
R2 = 0.689349
NIM is taken as dependent variable. The p-value of Hausman test was 0.0004 which
is less than 0.05. Accordingly, null hypothesis is rejected and alternative hypothesis,
fixed effect model is best fit model is selected. The value of R2 is 0.6893 which
indicate that, 68% variation in the NIM is because of independent variables NOF
142
and AOF. The p-value of an NOF and AOF is 0.0415 and 0.0461 which is less than
0.05. Therefore it can be observed that both the independent variables NOF and
AOF are significantly affecting the dependent variable. The p-value of F-Test is
0.000, which is less than 0.05 which shows joint influence of independent variables
on dependent variable leads to rejection of null hypothesis, which states that
frequency and severity of frauds in the banks have no significant impact on NIM of
the Indian banking sector as a whole. In other words, frequency and severity of
frauds in the banks have significant impact on NIM. Following equation is derived
on the basis of the result of panel regression analysis:
NIM it = 8.07 + 0.24 Frequency of Frauds it – 0.17 Severity of Frauds it

Frequency of frauds and Severity of frauds are + 0.24 and - 0.17 to predict the Net
Interest Margin (NIM).
4.4.3 Impact of frauds on the performance of Public Sector Banks

impact of frauds on the performance of public sector banks. Further, the Hausman
are taken into consideration and at the same time, diverse components of
performance viz. NP, ROA, ROE, ROI, ROAd. and NIM are considered to have
comprehensive evaluation of impact of frauds on the performance of public sector
banks. The hypothesis tested in this section and description of the model used is as:
Hypothesis 2. There is no significant impact of frequency and severity of frauds

on the performance of different classification of Indian Banking sector viz. public
banking sector.
Net Profit (NP) of Public Banking sector.
143
Return on Assets (ROA) of Public Banking sector.
Return on Equity (ROE) of Public Banking sector.
Return on Investment (ROI) of Public Banking sector.
Return on Advances (ROAd.) of Public Banking sector.
Net Interest Margin (NIM) of Public Banking sector.
Description of the Models:

Where, NP= Net Profits; ROA= Return on Assets; ROE= Return on Equity;
Frauds; β2= Coefficient of severity of Frauds or Amount of Frauds; µ= error term;
it= both time & cross sections.
Table 4.14: Result of Panel Regression for Public Banking Sector

(Dependent Variable-NM)

Constant (C) -874.2857 1063.450 0.4117
F- Test 3.048670 0.0000
R2 = 0.521091
144
where Net Profit (NP) is taken as dependent variable. The p-value of Hausman test
was 0.1623 which is more than 00.5. Hence the null hypothesis which states the
random effect model is a best fit model is selected. The value of R2 is 0.521091
which indicate that, 52% variation in the Net Profit (NP) is because of independent
variables NOF and AOF. The p-value of NOF and AOF is 0.0167 and 0.0444 which
is less than 0.05. Therefore it can be observed that both the independent variables
are significantly affecting the dependent variable Net Profit (NP). Therefore, the null
hypothesis, that frequency and severity of frauds in the banks have no significant
impact on their Net Profit (NP), is rejected. And alternative hypothesis, frequency
and severity of frauds in the banks have significant impact on their Net Profit (NP),
is accepted. The p-value of F-Test is 0.0000, which is less than 0.05 which shows
joint influence of independent variables on dependent variable leads to rejection of
null hypothesis, which states that frequency and severity of frauds in the banks have
no significant impact on NP of the public sector banks. In other words, frequency
and severity of frauds in the banks have significant impact on NP of the public
sector banks. Following equation is derived on the basis of the result of panel
regression analysis:
Net Profit= -874.28 +552.17 Frequency of Frauds +3.64 Severity of Frauds
In the above equation, the value of intercept is -874.28 and coefficients of

Frequency of frauds and Severity of frauds are +552.17 and +3.64 to predict the Net
Profit (NP).

Constant (C) 0.326366 0.034269 0.0000
F- Test 62.93457 0.0000
R2 = 0.607847
145
where ROA is taken as dependent variable. The p-value of Hausman test is 0.6432
model is a best fit model is selected. The value of R2 is 0.607847 which indicate
that, 60% variation in the ROA is because of independent variables viz. NOF and
AOF. The p-values of both the independent variables are 0.000 which is less than
0.05. Therefore it can be observed that both the independent variables NOF and
AOF are significantly affecting the dependent variable ROA. The p-value of F-Test
is 0.000, which is less than 0.05 which shows joint influence of independent
variables on dependent variable leads to rejection of null hypothesis, which states
that frequency and severity of frauds in the banks have no significant impact on
ROA of the public sector banks. In other words, frequency and severity of frauds in
the banks have significant impact on ROA of the public sector banks. Following
Return on Assets = 0.32 - 0.04 Frequency of Frauds +0.03 Severity of Frauds
In the above equation, the value of intercept is 0.32 and coefficients of Frequency of
frauds and Severity of frauds are - 0.04 and +0.03 to predict the Return on Assets
(ROA).
Table 4.16: Result of Panel Regression for Public Banking Sector (Dependent
Variable-ROE)

Constant (C) 5.316672 0.391786 0.0000
F- Test 7.954044 0.0000
R2 = 0.554268
146
Return on Equity ROE is taken as dependent variable. The p-value of Hausman test
is 0.0494 which is less than 0.05. Accordingly, null hypothesis is rejected and
R2 is 0.554268 which indicates that, 55% variation in the ROE is because of
independent variables, NOF and AOF. The p-value of both the independent
variables NOF and AOF is 0.000 which is less than 0.05. Therefore it can be
observed that both independent variables NOF and AOF are significantly affecting
the dependent variable ROE. The p-value of F-Test is 0.000, which is less than 0.05
which shows joint influence of independent variables on dependent variable leads to
rejection of null hypothesis, which states that frequency and severity of frauds in the
banks have no significant impact on ROE of the public sector banks. In other words,
frequency and severity of frauds in the banks have significant impact on ROE of the
public sector banks. Following equation is derived on the basis of the result of panel
regression analysis:
Return on Equity = 5.31 – 0.59 Frequency of Frauds + 0.34 Severity of Frauds



Constant (C) 63.94649 4.171350 0.0000
F- Test 10.85587 0.0000
R2 = 0.771253
147
where ROI is taken as dependent variable. The p-value of Hausman test is 0.1659
77% variation in the ROI is because of independent variables viz. NOF and AOF.
The p-value of both independent variables frequency of fraud (Number of Fraud)
and severity of fraud (Amount of Fraud) is 0.000 which is less than 0.05, i.e. less
than 5%. Therefore it can be observed that both the independent variables number of
fraud and amount of fraud are significantly affecting the dependent variable ROI.
The p-value of F-Test is 0.000, which is less than 0.05 which shows joint influence
of independent variables on dependent variable leads to rejection of null hypothesis,
which states that frequency and severity of frauds in the banks have no significant
impact on ROI of the public sector banks. In other words, frequency and severity of
frauds in the banks have significant impact on ROI of the public sector banks.
Following equation is derived on the basis of the result of panel regression analysis:
Return on Investment = 63.94 – 3.52 Frequency of Frauds + 1.42 Severity of Frauds

Return on Investment (ROI).


Constant (C) 1.709221 0.124112 0.0000
F- Test 5.849171 0.0000
R2 = 0.679700
148
ROAd. is taken as dependent variable. The p-value of Hausman test is 0.0046 which
indicate that 68% variation in the ROAd is because of independent variables viz.
NOF and AOF. The p-value of NOF and AOF is 0.0101 and 0.000 which is less than
0.05. Therefore it can be observed that independent variables NOF and AOF are
significantly affecting the dependent variable. The p-value of F-Test is 0.000, which
is less than 0.05 which shows joint influence of independent variables on dependent
variable leads to rejection of null hypothesis, which states that frequency and
severity of frauds in the banks have no significant impact on ROAd of the public
sector banks. In other words, frequency and severity of frauds in the banks have
significant impact on ROAd of the public sector banks. Following equation is
derived on the basis of the result of panel regression analysis:
Return on Advances = 1.70 +0.07 Frequency of Frauds + 0.05 Severity of

Frauds

Frequency of frauds and Severity of frauds are +0.07 and +0.05 to predict the Return
on Advances (ROAd.).

(Dependent Variable-NM)

Constant (C) 1.442352 0.067518 0.0000
Number of Fraud (NOF) 0.001010 0.015109 0.0467
F- Test 7.374267 0.0000
R2 = 0.549534
149
where NIM is taken as dependent variable. The p-value of Hausman test is 0.2088
model is a best fit model is selected. The value of R2 is 0.549534 which indicate
that, 54% variation in the NIM is because of independent variables viz. NOF and
AOF. The p-value of independent variables, NOF and AOF are 0.046 and 0.000
which is less than 0.05. Therefore it can be observed that both the independent
variables are significantly affecting the dependent variable Net Interest Margin
(NIM). The p-value of F-Test is 0.000, which is less than 0.05 which shows joint
influence of independent variables on dependent variable leads to rejection of null
hypothesis and acceptance of alternate hypothesis. Frequency and severity of frauds
in the banks have significant impact on NIM of the public sector banks. Following
Net Interest Margin = 1.44 +0.00 Frequency of Frauds + 0.02 Severity of Frauds

Frequency of frauds and Severity of frauds are + 0.00 and + 0.02 to predict the Net
4.4.4 Impact of frauds on the performance of Private Sector Banks

impact of frauds on the performance of private sector banks. Further, the Hausman
are taken into consideration and components of performance viz. NP, ROA, ROE,
ROI, ROAd. and NIM are considered to have comprehensive evaluation of impact
of frauds on the performance of private sector banks.
150
Hypothesis 3. There is no significant impact of frequency and severity of frauds

on the performance of different classification of Indian Banking sector viz. private
banking
Net Profit (NP) of Private Banking sector.
Return on Assets (ROA) of Private Banking sector.
Return on Equity (ROE) of Private Banking sector.
Return on Investment (ROI) of Private Banking sector.
Return on Advances (ROAd.) of Private Banking sector.
Net Interest Margin (NIM) of Private Banking sector.
Description of the Model:

Where, NP= Net Profits; ROA= Return on Assets; ROE= Return on Equity;
Frauds; β2= Coefficient of severity of Frauds or Amount of Frauds; µ= error term;
it= both time & cross sections.
Table 4.20: Result of Panel Regression for Private Banking Sector

(Dependent Variable-NP)

Constant (C) 974.0210 197.8647 0.0000
151
Amount of Frauds 230.4808 167.8435 0.0115

F- Test 18.70981 0.0000
R2 = 0.681353
Net profit (NP) is taken as dependent variable. The p-value of Hausman test is
0.0000 which is less than 0.05. Accordingly, null hypothesis is rejected and
R2 is 0.681353 which indicate that, 68% variation in the net profit is because of
independent variables viz. NOF and AOF. The p-value of the independent variables,
NOF and AOF are 0.0007 and 0.0115 which is less than 0.05. Therefore it can be
observed that both the independent variables, NOF and AOF are significantly
affecting the dependent variable Net Profit (NP). The p-value of F-Test is 0.000,
which is less than 0.05 which shows joint influence of independent variables on
dependent variable leads to rejection of null hypothesis, which states that frequency
and severity of frauds in the banks have no significant impact on NP of the private
sector banks. In other words, frequency and severity of frauds in the banks have
significant impact on NP of the private sector banks. Following equation is derived
on the basis of the result of panel regression analysis:
Following equation is derived on the basis of the result of panel regression

analysis:
Net Profit = 974.02– 0.23 Frequency of Frauds + 230.48 Severity of Frauds

Net Profit (NP).
152


Constant (C) 0.269836 0.026763 0.0000
Number of Frauds (NOF) 7.05E-06 4.37E-06 0.1083
F- Test 2.072221 0.1286
R2 = 0.021022
where ROA is taken as dependent variable. The p-value of Hausman test is 0.3529
model is a best fit model is selected. The value of R2 is very less i.e. 0.021022 which
indicate that very nominal variation i.e. 2% variation in the ROA is because of
independent variables viz. NOF and AOF. The p-value of the independent variables,
NOF and AOF are 0.1083 and 0.2286 which is more than 0.05. Therefore it can be
observed that both the independent variables NOF and AOF are not significantly
affecting the dependent variable ROA. The p-value of F-Test is 0.1286, which is
more than 0.05, leads to acceptance of null hypothesis, which states that frequency
and severity of frauds in the banks have no significant impact on ROA of the private
sector banks. No equation is derived to predict the Return on ROA since the result of
panel regression analysis is insignificant.

(Dependent Variable-ROE)

Constant (C) 3.229928 0.225188 0.0000
153
F- Test 3.524346 0.031382

R2 = 0.535235
where ROE is taken as dependent variable. The p-value of Hausman test was 0.7048
53% variation in the ROE is because of independent variables viz. NOF and AOF.
The p-value of the independent variables, NOF and AOF are 0.0382 and 0.0202
which is less than 0.05. Therefore it can be observed that both the independent
variables NOF and AOF are significantly affecting the dependent variable ROE. The
p-value of F-Test is 0.031, which is less than 0.05 shows joint influence of
independent variables on dependent variable leads to rejection of null hypothesis,
which states that NOF and AOF in the banks have no significant impact on ROE of
the private sector banks. Following equation is derived on the basis of the result of
panel regression analysis:
Return on Equity =3.22 + 4.43 Frequency of Frauds + 0.21 Severity of Frauds



Constant (C) 1.949438 0.019918 0.0000
Number of Frauds (NOF) -1.65E-06 4.32E-06 0.7026
154
F- Test 2.081666 0.127514

R2 = 0.021116
where ROI is taken as dependent variable. The p-value of Hausman test is 0.2291
2% variation in the ROI is because of independent variables viz. NOF and AOF. The
p-value of independent variables, NOF and AOF are 0.7026 and 0.0644 which is
more than 0.05. Therefore it can be observed that both the independent variables are
not significantly affecting the dependent variable ROI. The p-value of F-Test is
0.1275, which is more than 0.05, shows the joint influence of independent variables
on dependent variable leads to acceptance of null hypothesis, which states that
frequency and severity of frauds in the banks have no significant impact on ROI of
the private sector banks. No equation is derived to predict the Return on ROI since
the result of panel regression analysis is insignificant.


Constant (C) 11.13035 0.172555 0.0000
F- Test 4.646974 0.000000
R2 = 0.648167
155
ROAd is taken as dependent variable. The p-value of Hausman test is 0.0213 which
indicate that, 64% variation in the ROAd is because of independent variables viz.
NOF and AOF. The p-value of the independent variables, NOF and AOF are
number of fraud is 0.0148 and 0.0218 which is less than 0.05. Therefore it can be
observed that independent variables are significantly affecting the dependent
variable. The p-value of F-Test is 0.000, which is less than 0.05 shows joint
influence of independent variables on dependent variable leads to rejection of null
hypothesis, which states that NOF and AOF in the banks have no significant impact
on ROAd of the private sector banks. Following equation is derived on the basis of
the result of panel regression analysis:
Return on Advances = 11.13+ 2.20 Frequency of Frauds + 0.15 Severity of Frauds

Return on Advances (ROAd.).

(Dependent Variable-NIM)

Constant (C) 1.705521 0.044393 0.0000
Number of Frauds (NOF) -1.20E-05 6.75E-06 0.0468
F- Test 2.992898 0.004475
2
R = 0.730082
where NIM is taken as dependent variable. The p-value of Hausman test is 0.6615
156
model is a best fit model is selected. The value of R2 is 0.730082 which indicate that
73% variation in the NIM is because of viz. NOF and AOF. The p-value of
independent variables NOF and AOF are 0.0468 and 0.0407, which is less than 0.05.
Therefore it can be observed that the independent variables are significantly
affecting the dependent variable. The p-value of F-Test is 0.004, which is less than
0.05 shows joint influence of independent variables on dependent variable leads to
rejection of null hypothesis, which states that NOF and AOF in the banks have no
significant impact on NIM of the private sector banks. In other words, frequency and
severity of frauds in the banks have significant impact on NIM of the private sector
banks. Following equation is derived on the basis of the result of panel regression
analysis:
Net Interest Margin = 1.70-1.20 Frequency of Frauds + 0.02 Severity of Frauds

Frequency of frauds and Severity of frauds are - 1.20 and + 0.02 to predict the Net
The expected relationship between dependent variables [Net Profit (NP),

Return on Return on Assets (ROA), Return on Equity (ROE), Return on Investment
(ROI), Return on Advances (ROAd.) and Net Interest Margin (NIM)] and
independent variables [Frequency/Numbers of Frauds (NOF) and Severity/Amount
of Frauds (AOF)] is negative. In the common phenomena when frequency and
severity of fraud increases, performance of banks is adversely affected. The analysis
shows that in the overall cases where we exclude the two cases where models were
found insignificant, 37.5 per cent cases shows the same expected and actual
relationship between dependent variables and frequency of frauds and 18.75 per cent
cases witnessed same expected and actual relationship between dependent variables
and severity of frauds. Following are the main reasons for the difference in expected
and actual relationship:
During the study period, year in which frauds occurred and year in which
frauds detected were different. Due to this reason, the financial statements of
157
the public and private sector banks showed increase in the profitability
components the result shows the different sign in expected and actual result.
Generally banks transfer significant amount of profit to the reserve and
create provisions annually to reduce the effect of anticipated losses and Non
Performing Assets (NPAs). Provisions are made on Sub-standard and
Doubtful assets as per NPA provisioning norms prescribed by Reserve Bank
of India (RBI). When frauds come into existence, the government bodies
start their efforts to capture the assets/properties and recover the amount of
fraud up to some extent. The uncovered amount of frauds becomes NPAs
and provisions are used to write off NPAs. In this way the effect of frauds
minimizes and profitability increase.
A closer analysis during the study period shows severity of frauds was quite
consistent and near to minimum in the initial 7 years from 2005-06 to 2011-
12 and quite high in the last 4 years from 2012-13 to 2015-16. Detection of
these higher severity of frauds relate to subsequent years in which they
occurred.
The maximum severity of frauds was found in 2014-15 during the study
period. In 2014-15, the main banking indicators like aggregate capital,
reserves and surplus, deposits, investments and loans and advances were also
at their peak during the study period.
158
93272.9
100000
90000
73881.6
80000
70000
60000
50000
40000 29775.92
30000
20000 8227.98
10000 818.39
0
Capital Reserves Deposits Investment Loans and
and Surplus Advances
Amount (₹ Billions)

Figure 4.3: Leading indicators of Indian Economy in 2014-15
Figure 4.3 shows the GDP of the Indian economy was ₹5741791
crores in
2014-15 which was highest during the study period. So effect of increasing frauds
were compensated with increasing trends of consolidated capital, reserves and
surplus, deposits, investment and loans and advances which leads to increase in the
performance of banks despite of increase in frauds.
Table 4.26: Relationship between Expected and Actual Outcome
Banking Sector as a whole

Frequency Severity
Expected Actual Result Expected Actual Result
NP - + Significant - + Significant
ROA - + Significant - - Significant
ROE - + Significant - - Significant
ROAd - - Significant - + Significant
ROI - + Significant - + Significant
NIM - + Significant - - Significant
159
Public Sector
NP - + Significant - + Significant
ROA - - Significant - + Significant
ROE - - Significant - + Significant
ROAd - - Significant - + Significant
ROI - + Significant - + Significant
NIM - + Significant - + Significant
Private Sector
NP - - Significant - + Significant
ROA - Model is not significant - Model is not significant
ROE - + Significant - + Significant
ROAd - + Significant - + Significant
ROI - Model is not significant - Model is not significant
NIM - - Significant - + Significant
4.5 CONCLUSION
In nutshell the measurement of impact of frauds on the performance of the
Indian banking sector and its diverse classification has provided with the meaningful
inferences, which shows that NOF and AOF are the growing phenomena of the
Indian Banking sector and is significantly affecting the Indian banking sector and its
classification. Last but not the least the results of the hypotheses testing is
summarised in the table 4.23. It shows that frequency and severity of frauds have
significant impact on the performance of the Indian banking sector. The similar
results are in public sector banks i.e. frequency and severity of frauds have
significant impact on the performance. As far as impact of frauds on the
performance of private sector banks are concerned, variation in results is found in
comparison of Indian banking sector as a whole and public sector banks as the
frequency and severity of frauds have significant impact on the components of
performance of private sector banks except ROA and ROI.
160

Chapter-4 Impact of Frauds On The Performance of Banks in India

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Chapter-4 Impact of Frauds On The Performance of Banks in India

Uploaded by

Copyright:

Available Formats

CHAPTER-4

IMPACT OF FRAUDS ON THE

4.1 INTRODUCTION 121-122

IMPACT OF FRAUDS ON THE PERFORMANCE

4.2 DESCRIPTIVE STATISTICS

Table 4.1: Descriptive Statistics

Private Sector Banks

Table 4.1 shows the descriptive statistics comprise of mean, median,

Alternatively, by considering the classification of banking sector viz. public

(Amounts of Fraud in ₹Crores)

PUB PVT PUB PVT

Source: Researcher’s own Compilation (Amounts of Fraud in ₹Crores)

4.3 TESTING OF ASSUMPTIONS

4.3.1 Normality Test

Table 4.2: Stages of Transformation and Methods Used

Entire Banking Sector

Public Sector Banks

Private Sector Banks

 At second level transformation by Reflect and Log 10 on the remaining

4.3.2 Serial Correlation/Autocorrelation Test of Residuals

Table 4.3: Results of Autocorrelation in the Residuals

NP ROA ROE ROI ROAd. NIM

Breusch-Godfrey Serial 0.6383 0.9711 0.9203 0.3163 0.0725 0.0889

4.3.3 Heteroscedasticity Test of Residuals

Table 4.4: Results of Heteroscedasticity Test

4.4 ANALYSIS AND INTERPRETATION

The hypotheses in the correlation test are as follows:

In this section the correlation among the variable under consideration is

NOF AOF NP ROA ROE ROAd ROI NIM

ROI Pearson -.088** .108* -.134** .042** .040** .062** 1 .309**

NOF AOF NP ROA ROE ROAd ROI NIM

ROA Pearson .075** -.371** .265** 1 .940** -.028** -.083** .416**

NOF AOF NP ROA ROE ROAd ROI NIM

4.4.2 Impact of frauds on the performance of Indian Banking Sector

Hypothesis 1: There is no significant impact of frequency and severity of frauds

Description of the Models:

Table 4.8: Result of Panel Regression for Banking Sector

Coefficient Standard Error P-Value

NP it = 325.54 + 597.50 Frequency of Frauds it + 13.88 Severity of Frauds it

In the above equation, the value of intercept is 325.54 and coefficients of

Table 4.9: Result of Panel Regression for Banking Sector

Coefficient Standard Error P-Value

ROA it = 0.97 + 0.22 Frequency of Frauds it – 0.13 Severity of Frauds it

In the above equation, the value of intercept is 0.97 and coefficients of

Table 4.10: Result of Panel Regression for Banking Sector

Coefficient Standard Error P-Value

ROE it = 13.76 + 4.22 Frequency of Frauds it – 2.23 Severity of Frauds it

In the above equation, the value of intercept is 13.76 and coefficients of

Table 4.11: Result of Panel Regression for Banking Sector

Coefficient Standard Error P-Value

ROI it = 53.77 – 2.77 Frequency of Frauds it + 1.36 Severity of Frauds it

In the above equation, the value of intercept is 53.77 and coefficients of

Table 4.12: Result of Panel Regression for Banking Sector

Coefficient Standard Error P-Value

independent variables are significantly affecting the ROAd. dependent variable.

ROAd it = 3.14 + 0.01 Frequency of Frauds it + 0.01 Severity of Frauds it

In the above equation, the value of intercept is 3.14 and coefficients of

Table 4.13: Result of Panel Regression for Banking Sector

Coefficient Standard Error P-Value

NIM it = 8.07 + 0.24 Frequency of Frauds it – 0.17 Severity of Frauds it

In the above equation, the value of intercept is 8.07 and coefficients of

4.4.3 Impact of frauds on the performance of Public Sector Banks

At second level transformation by Reflect and Log 10 on the remaining

ROI Pearson -.088** .108* -.134 .042 .040 .062 1 .309**

ROA Pearson .075 -.371 .265 1 .940 -.028 -.083 .416**