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Yashes Dissertation
Yashes Dissertation
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.
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
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)
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