Page 1 of 7
European Journal of Business &
Socqial Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 04
April 2019
Available online: https://ejbss.org/ P a g e | 2170
A Critical Analysis of the Punjab National
Bank Scam and Its Implications
MS. POOJA SHARMA, MS. BHARTI GUPTA, MS TANU SETIYA
Institute Of Engineering And Technology, MIA Alwar (Raj.)
MR. RAJESH KUMAR
Ass. Prof.- Department of Management studies- Institute of Engineering
&Technology Alwar (Raj.)
Abstract
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.
Keywords: PNB, Scam, Audit, RBI, 5W2H, LOU.
1. Introduction
World credit market faced a huge turmoil during the financial crisis of 2007 and many big banks as in [1] and
financial institutions filed for bankruptcy including Lehman brothers [2]. The impact of crisis was profound
and many banks and financial institutions in US faced massive credit crunch [3]. Economists have noted that
recessions accompanied by banking crises tend to be deeper and more difficult to recover from than other
recessions [4].The Second largest PSU Bank in India on Feb 14th, 2018 reported fraudulent transactions worth
Rs 11,400 crore to stock exchanges and law enforcement agencies. The scam which initially was estimated to
11,400 crore, now added up to 12,700 crore is nearly one-third of the Net worth of Punjab National Bank
(PNB) is now termed as a country’s biggest banking fraud. The banks are already facing turmoil due to weak
capital management. Eleven of India’s twenty one listed government-owned banks are now under the Reserve
Bank of India’s watch due to large bad loans, weak capital levels and low return on assets. Together these
banks account for over Rs. 3 lakh crore in bad loans of the total of Rs 8.4 lakh crore across India’s listed banks
[5]. When the government is planning to recapitalize the banks [6] the PNB scam comes as a huge blow.
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European Journal of Business &
Socqial Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 04
April 2019
Available online: https://ejbss.org/ P a g e | 2171
This paper attempts to dissect the PNB scam through comprehensive analysis. It uses the quality management
tool which investigates the scam in-depth to reveal various internal and external factors associated with the
scam. Banking sectors, jewellery sector and insurance sector were affected by the scam. This paper also aims
to find the impact of the scam on various sectors of the Indian economy.
2. Literature Review
Mergers of giants in the banking industry gave birth to the concept of “too big to fail”, which eventually led to
highly risky financial objectives and financial crisis of 2008. In response to the 2008 crisis, Dodd Frank Act
[7] gave birth to various new agencies to help monitor and prevent fraudulent practices. Volcker rule, a part of
DFA, banned banks from engaging in proprietary trading operations for profit. Indian banking system has
already been plagued with growth in NPAs [8] during recent years, which resulted in a vicious cycle affecting
its sustainability. Chakrabarty [9] Deputy Governor of Reserve Bank of India noted in his speech that, while
most numbers of frauds have been attributed to private and foreign banks, public sector banks have made the
highest contribution towards the amount involved. monitoring of frauds by the board of directors by banks of
India [12], A circular was issued as per RBI [13] to cooperative banks to set up a committee to oversee internal
inspection and auditing, and plan on appropriate preventive actions, followed by review of efficacy of those
actions.
Key findings in RBI [12] included the stress of asset quality and marginal capitalization faced by public sector
banks, and various recommendations to address these issues. Good governance and more autonomy [14] to be
conferred to public sector banks to increase their competitiveness and to be able to raise money from markets
easily.
In response to the common perception that increasingly strict regulations will make business opportunities take
a hit. Basic principles [15] that can go a long way in preventing fraud, namely the principles of knowing the
customer and employees as well as partners. He also pointed out the significance of a robust appraisal
mechanism and continuous monitoring.
Great recession 2007 resulted in bankruptcy of many banks and financial institutions. The Great Recession
which had its impact globally was associated with a severe financial crisis, but depositors were not rushing to
the banks to withdraw their deposits.
Banks suffered losses [16] on a scale not witnessed since the Great Depression. It is precisely this special “risk
evaluator” role that makes the banking industry particularly opaque. The opacity of the sector has probably
increased in recent years due to the structural changes brought about by deregulation and financial innovation;
changes that have made the industry significantly more complex, larger, more global and dependent on
financial markets. Bad accounting treatment of financial transactions, loose risk management policies and
strategies led the financial conglomerate to its eventual collapse.
3. Objectives of the Study
Objectives of the study include
1. To analyze the Punjab National Bank scam critically using 5W2H analysis.
2. To study the impact of scam on stock market, banking sector and jewelry sector.
3. To study the impact of scam on PNB rating given by various Indian and global rating agencies.
4. Research Methodology
This paper uses secondary data. The fraud came to light in January 2018. All the Newspaper articles, national
and international periodicals related to scam from January 2018 to March 2018 was reviewed. Bank stock
market data was taken from Sensex and other data was taken from financial information News Company like
Bloomberg. The methodology used for analysis of the scam is 5W2H.
5W2H is a quality management tool which aims at examining the problem with the aim to reach feasible
solutions. This analyses the problem in parts and hence follows the divide and rule approach. This tool helps in
Page 3 of 7
European Journal of Business &
Socqial Sciences
Available at https://ejbss.org/
ISSN: 2235-767X
Volume 07 Issue 04
April 2019
Available online: https://ejbss.org/ P a g e | 2172
gaining a clear perspective about the various constituents of a problem and thus helps in improving the overall
process.
5W2H stands for 5 Ws and 2Hs or Who, What, When, Where, Whey How and How much. When working on
improving a process this is a very simple tool to help think thorough improvement opportunities
TABLE 1: 5W2H OF THE PNB SCAM
What? What happened?
On 14 February, state-owned Punjab National Bank (PNB) disclosed that it has discovered $ 1.77-billion (around Rs
11,400 crore) worth of fraudulent transactions at one of its Mumbai branches. In a complaint to the Central Bureau of
Investigation, the bank had named the firms and people associated with billionaire jeweler Nirav Modi to have caused this
massive fraud using the bank officials.
What is the scope of the problem?
1. PNB is left holding bank guarantees worth Rs 11,400 crore which it has to pay to, among others, State Bank of India,
Allahabad Bank and Union Bank. These payments are due over the next few months.
2. This has affected the banking sector, jewellery sector and the insurance sector.
3. This also questions the credibility of the Public Sector Banks, the role of regulators namely RBI and SEBI
When? When did it happen?
PNB filed a fraud complaint against Modi group firms with RBI on 29/01/18.
O4/02/18: CBI issues lookout notice against NiravModi
05/02/18: PNB informs stock exchanges about the Rs 281 crore fraud involving the Modi group
14/02/18: PNB informs the stock exchanges of the magnitude of the fraud
When did it start? When did it stop?
According to the FIR, two junior employees of PNB had been sending these unauthorized guarantees for seven years.
Then one of them retired. In January, when representatives of Modi firms asked for a fresh guarantee, the new PNB
employee in that position asked for collateral security. On being told that this was never asked for in the past, the bank
started investigating and found hundreds of guarantees relating to these firms.
Who? Who faced the problem?
PNB has faced the problem amounting to 11,400 crores. According to banking circles, PNB will have to make good the
lost money even though technically Allahabad Bank and Axis Bank took the exposure
.
Who reported the problem?
The problem was detected and reported by PNB to RBI and CBI.
Who are the parties involved?
Former employees of the Bank who issued the money Nirav Modi Allahabad and Axis bank who honoured the payment
Where? Where did it happen?
It had happened within the operating environment of PNB. It could be termed as in house because the swift transaction on
request was cleared by the PNB officials. Hence we have a question on the authenticity of the system for Letter of Credits
at PNB.
The two employees of PNB directly used SWIFT - the global financial messaging service used to move millions of dollars
across borders every hour — and bypassed the core banking system (CBS) which processes daily banking transactions and
posts updates.
How much is the loss? 12000 crore
Why? Why is it a problem?
