CHAPTER I

INTRODUCTION

1.1 MEANING OF BANK

A bank (German word) means a joint stock fund. A bank denotes a financial institution dealing in money. A
bank is an institution that is prepared to accept deposits of money and repay the same on demand. The
system of banking is very old and the same was prevalent in Greece, India and Rome A banker (i.e., person
or a corporation) deals in credit and money i.e. it accepts deposits from those who want to commit their
wealth to safety and earn interest thereon, and lends money to the needy through cheques and advances and
loans of various sorts.

1.2 FUNCTION OF BANK

1. COLLECTION OF THE SAVING OF THE COMMUNITY:

Nowadays people do not keep their savings at home. They deposit them in banks. Thereby the risk of loss
(from theft, etc.) is avoided. Moreover, some interest is earned. There are different kinds of deposits. Some
are current deposits.

The interest paid on such deposits is either very small or nil. Some deposits are withdrawable after a fixed
period (one year, two years, etc.) or are subject to certain fraction of the sums deposited, etc.). Such deposits
are called time deposits. There are different names for the different varieties of time deposits, e.g., fixed
deposits, savings deposits, etc. Time deposits earn higher rates of interest.

2. LOAN AND INVESTMENT:

Banks lend money to traders, industrialists and other persons. Lending is done through a variety of methods.
Sometimes an account is opened in the name of the borrower and he is allowed to draw cheques on it. A man
having an account may be given the right to draw more money than what he has in the account. This is
known as overdraft facility. A bank may also lend money by discounting a bill of exchange.

Banks invest money on shares and debentures of companies and on Government Promissory Notes. They
lend money to industrial concerns against the security of Government Promissory Notes, shares, debentures,
gold, goods in course of manufacture, etc. Loans are also given to private individuals against G. P. Notes,
shares, debentures, life insurance policies, and gold.

3. ISSUE CURRENCY:

Formerly banks could print and issue notes payable by them on demand. The notes were used as a medium
of exchange. Nowadays only the central bank of the country can issue notes. Banks, however, can give loans
in excess of the money deposited with them. Cheques can be drawn against such loans and the cheques can
be used as media of exchange. Thus, banks can create money.

4. MAINTAIN FOREIGN EXCHANGE RESERVE:

All foreign exchange reserve of country is maintained and control by the central bank. It regulates the flow
of foreign exchange to various sector and needs according to priorities. This function facilitates the central
bank to maintain stability of exchange rate.

5. CONTROL OF CREDIT:

The bank control volume and direction of credit. It uses both quantitative and qualitative measures to control
credit. This function aims at price and exchange rate stability to promote economic growth and development.

6. SUPPLY OF FINANCE:

Banks lend money for industrial, commercial and other purposes. Loans may be given in a variety of ways,
viz., cash credit, overdraft facilities and the discounting of commercial papers like bills of exchange, hundis,
etc. Commercial banks generally confine themselves to short-term lending against readily realisable
securities like gold, government promissory notes, bills of exchange and hundis. Other types of banks (e.g.,
Mortgage Banks, Industrial Banks) lend money for long periods against the security of immovable property
and industrial assets.

7. DEVELOPMENT AND GROWTH OF ECONOMY:

In an underdeveloped economy, the commercial banks play a constructive role. In a socialistic pattern of
society, there is social control of banks.

1) Finance agriculturists and industrialists liberally,

2) Attract deposits from public by giving higher interests with tempting schemes, and

3) Open branches in rural areas and in the suburbs of the towns.

8. SUBSIDARY FUNCTION

Bank performs a variety of miscellaneous function on behalf of their customers:

I. They act as agent for the purchase of shares and securities.

II. They collect and pay bills.
III. They can be appointed trustees, executors and administrators of estate.
IV. They keep valuable in safe custody
V. They issue letter of credit and travellers cheques.
 VI. They arrange for transfer of money from one place to another by banker’s draft or otherwise
VII. Same banks deals in foreign exchange and foreign money can be obtained through them, subject to
the foreign exchange regulation of the countries concerned.
9. PROMOTION OF TRADE ESPECIALLY FOREIGN TRADE:

The bills of exchange have increased the scope of both internal and external trade as the trade- payments can
now be made without the transfer of funds or gold. The commercial credit enables the buyers to make
payments for the value received at convenient times. So, the credit system enables the traders to tide over
periods of difficulty.

10.ECONOMY IN THE USE OF MONEY:

The credit system economises the use of metallic money and paper notes. The credit instruments like
promissory notes, bills of exchange, cheques, credit cards, etc. are used in the modern society as money-
substitutes, and so they have reduced the cost of issuing metallic money and paper notes. Likewise they have
minimized or eliminated the risks and inconveniences involved in cash transactions.

1.3 INDIAN BANKING:

Money plays a dominant role in today’s life. Money’s evaluation had been from coins to paper currency
note to credit cards. Commercial transactions have increased in content and quantity from simple barter
to speculative international trading. To handle all these complex activities, need arose for a third party,
who will assist smooth handling of transactions, mediate between seller and buyer, hold custody of
money and good, remit funds and also to collect proceeds. This mediator was called the banker. As the
number of such mediators grew, the need to control and regulate their activities invited government
control.
Encyclopaedia Britannica defines a commercial banker as dealers in money and in substitute for money,
such as cheques or bill of exchanges He also provides variety of financial services. The basis of his
business is borrowing by individuals, firms and occasionally from government. With these resources
and also with his, own capital, the banker makes loans and extends credit and also invests in securities.
The bankers make his profit by borrowings at one rate of interest and lending at higher rate and by
charging commission for service rendered.
The banks must have cash balances on hand in order to pay its depositors on demand or when the
amounts credited by them become due. It must also keep a portion of assets in forms that can be readily
converted into cash.
Only in thus way can the confidence in the banking system be maintained, provided it honours it
promises (to convert notes into gold or provide cash in exchange for deposit balances.). A bank can
create credit for use by its customers by issuing additional notes or by making new loans, which in their
turn become new deposits. The amount of credit it extends may considerably exceed the sum available
to it in cash. But a bank will only able to do this as long as public believes the bank can and will honour
 its obligation which are accepted at the face value and circulate as money. So long as they remain
outstanding, these promises are obligation, which constitute claims against the banks and can be
transferred by means of cheque or other negotiable instruments from own party to another.

1.4 History of Banking in India in Brief (Before & After Independence)

Today, our banking system is mainly divided into commercial banks(both public and private banks),
regional rural banks, cooperative banks etc. the importance phase in the history of Indian banking was
nationalization of banks that makes way for the Indian Economy to enter in the top 10 economies of the
world.
1.4.1 Phases of Indian banking system
The advancement in Indian banking system is classified in 3distinct phases
1. The pre independent phases i.e. before 1947
2. Second phase from 1947 to1991
3. Third phase 1991 and beyond

1. The pre- independence phase i.e. before 1947

 This phase is characterised by the presence of a large number of banks ( more than 600).
 Banking system commenced in India with the foundation of Bank of Hindustan in Calcutta( now
Kolkata) in 1770 which ceased to operate in 1832.
 After that many banks came but were not successful like:
1. General bank of Indian (1786-1791)
2. Oudh commercial bank (1881-1958) – the first commercial bank of India.
 Whereas some are successful and continue to lead even now like:
1. Allahabad bank (est.1865)
2. Bank of India (est.1906)
3. Bank of Baroda (est.1908)
4. Central Bank of India ( est.1911)
 While some other like Bank of Bengal (est.1806), Bank of Bombay (est.1840), Bank of Madras
(est.1843) merged into a single entity in 1921 which came to be known as Imperial bank of India
 Imperial Bank of India was later renamed in 1955 as the State bank of India.
 In April 1935, Reserve Bank of India was formed based on the recommendation of Hilton Young
commission ( set up in 1926)
 In this time period, most of the bank were small in size and suffered from a high rate of failures. As a
result, public confidence is low in these banks and deposit mobilization was also very slow. People
continued to rely on the unorganized sector (moneylenders and indigenous bankers).

2. The second phase from 1947 to 1991

  With the view of economic planning. Nationalization emerged as an effective measure.

Need for nationalization in India:

a) The banks mostly catered to the needs of large industries. Big business houses.
b) Sectors such as agriculture, small- scale industries and exports were lagging behind
c) The poor masses continued to be exploited by the moneylenders.
 Following this, in the year 1949, 1st January the Reserve Bank of India was nationalized.
 Fourteen commercial banks were nationalized on 19th July 1969. Smt. Indira Gandhi was the prime
minister of India, during in 1969. The following banks are nationalized:
1. Central bank of India
2. Bank of India
3. Punjab National Bank
4. Bank of Baroda
5. United Commercial Bank
6. Canara bank
7. Dena Bank
8. United Bank
9. Allahabad Bank
10. Indian Bank
11. Union Bank of India
12. Bank of Maharashtra
13. Indian overseas bank
 Six more commercial banks were nationalized in April 1980. These are mentioned below:
1. Andhra bank
2. Corporation bank
3. New bank of India
4. Oriental bank of commerce
5. Punjab & Sindh bank
6. Vijaya bank
 Meanwhile, on the recommendation of the Narasimham committee Regional Rural Banks (RRBs)
were formed on Oct 2, 1975. The objective behind the formation of RRBs was to serve the large
unserved population of rural areas and promoting financial inclusion.
 With a view to meet the specific requirement from the different sector (i.e. agriculture, housing
foreign trade, industry) some apex level banking institution were also set up like.
1. NABARD (est.1982)
2. EXIM (est.1982)
3. NHB(est.1988)
4. SIDBI(est.1990)

Impact of nationalization

 Improved efficiency in the banking system- since the public’s confidence got boosted.
 Sectors such as Agriculture, small and medium industries started getting funds which led
to economic growth
 Increased penetration of Bank branches in rural areas.

3. Third phase 1991 and beyond

 This period saw remarkable growth in the process of development of banks with
liberalization of economic policies
 Even after nationalization and the subsequent regulations that followed a large portion of
masses in untouched by the banking services.
 Considering this, in 1991, the Narasimham committee gave its recommendation i.e. to
allow the entry of private sector player into the banking system.
 Following this, RBI gave license to 10 private entities, out of which few survived the
market demands, which are- ICICI, HDFC, Axis Bank, IndusInd Bank, DCB.
 In 1998, the Narsimham committee again recommended the entry of more private players.
As a result, RBI gave a license to the following newbies:
a) Kotak Mahindra Bank (2001)
b) Yes Bank (204)
 In 2013-14, the third round of bank licensing took place and in 2015, IDFC bank and
Bandhan emerged
 In order to further financial inclusion, RBI also proposed to set up 2 new kinds of banks I.e.
Payment banks and small banks.
 In 2015, RBI gave in principle licence to 11 entities to launch Payment bank and granted ‘in-
principle’ approval to the 10 applicants to set up small finance banks.

The RBI issued a licensed to the banks under section 22(1) of the banking regulation Act.1949, to
carry on the business of small finance banks (SFB) and payment bank in India.

 Committee on small banks: the application were analysed and evaluated by an external
Advisory committee (EAC). The EAC for small banks was chaired by USHA THORAT
former deputy governor, RBI.
 Committee on payment banks: These applications were analysed and evaluated by an
external advisory committee (EAC), the EAC committee for payment banks was chaired by
Dr. Nachiket MOR, Director, and Central Board of Reserve bank of India
1.5 LIST OF SMALL FINANCE BANK

BANK NAME COMMENCED HEADQUARTER

Capital small finance bank April 2016 Jalandhar, Punjab
Equitas small finance bank September 2016 Chennai, Tamil Nadu
Utkarsh small finance bank January 2017 Varanasi, UP
Suryoday small finance bank January 2017 Belapur, Navi Mumbai
Ujjivan small finance bank February 2017 Bengaluru, Karnataka
ESAF small finance bank March 2017 Thrissur, Kerala
AU small finance bank April 2017 Jaipur, Rajasthan
Fin care small finance bank September 2017 Bengaluru, Karnataka
North small finance bank October 2017 Guwahati, Assam
Jana small finance bank March 2018 Bengaluru, Karnataka

1.6 LIST OF PAYMENT BANK

BANK NAME COMMENCED HEADQUARTER

Airtel payment bank LTD November 2016 New Delhi, India
Paytm payment bank November 2017 Noida, up
Fino payment bank July 2017 Mumbai Maharashtra
Jio payment bank April 2017 Mumbai Maharashtra
Aditya Birla Idea payment bank February 2018 Mumbai, Maharashtra
India post payment bank September 2018 New Delhi India
1.7 TYPES OF BANK IN INDIA

1. CENTRAL BANK
Every country has a Central Bank of its own generally regulated by a special act. Central banks are bankers’
banks, and these banks trace their history from the Bank of England. It is called a Central Bank because it
occupies a central position in the banking system and acts as the highest financial authority. The main
function of this bank is to regulate and supervise the whole banking system in the country. It is a banker's
bank and controller of credit in the country. They guarantee stable monetary and financial policy from
country to country and play an important role in the economy of the country. Typical functions include
implementing monetary policy, managing foreign exchange and gold reserves, making decisions regarding
official interest rates, acting as banker to the government and other banks, and regulating and supervising the
banking industry. These banks buy government debt, have a monopoly on the issuance of paper money, and
often act as a lender of last resort to commercial banks. The Central bank of any country supervises controls
and regulates the activities of all the commercial banks of that country. It also acts as a government banker.
It controls and coordinates currency and credit policies of any country. In India, Reserve Bank of India is the
central bank. It is the apex bank and the statutory institution in the money market of the country.

2. SCHEDULE AND NON SCHEDULE BANK

Scheduled Banks in India are those banks which have been included in the Second Schedule of Reserve
Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the
criteria laid down vide section 42 (6) (a) of the Act. As on 30 June 1999, there were 300 scheduled banks in
India having a total network of 64,918 branches. Scheduled commercial banks in India include State Bank of
India and its associates (5), nationalized banks (20), foreign banks (45), private sector banks (32), co-
operative banks and regional rural banks. "Scheduled banks in India" means the State Bank of India
constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State
Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under
section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or
under section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of
1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank of India Act,
1934 (2 of 1934), but does not include a co-operative bank". Scheduled banks have paid up capital and
reserves of value of not less than Rs 5 lakhs and are eligible for loans and other privileges from the central
bank like membership to clearing house. RBI has no specific control over non-scheduled banks as they are
not included in the second schedule of RBI Act, 1934. Scheduled banks can be further classified as:

1) Public sector

2) Private sector

3) Foreign bank

4) Regional rural bank

5) Cooperative bank
3. COMMERCIAL BANK

Banking means accepting deposits of money from the public for the purpose of lending or investment.
Deposit-taking institutions take the form of commercial banks, when they use the deposits for making
commercial, real estate, and other loans. Commercial banks in modern capitalist societies act as financial
intermediaries, raising funds from depositors and lending the same funds to borrowers. The commercial
bank serves the interests of its depositors by utilizing the funds collected in profitable ventures and in-return
offers variety of services to its customers. Services provided by commercial banks include, credit and debit
cards, bank accounts, deposits and loans, and deposit mobilization. They also provide secured and unsecured
loans. These commercial banks are the oldest institutions in banking history and generally have a wide
network of branches spread throughout the area of their operations. Commercial banks may either be owned
by the government or may be run in the private sector. Based on their ownership structure they can be
classified as:

1) Public Sector
2) Private Sector
3) Foreign Banks
4) Regional Rural Banks
4. PUBLIC SECTOR BANK
Public sectors banks are those in which the government has a major stake and they usually need to
emphasize on social objectives than on profitability. The main objectives of public sector banks is to ensure
there is no monopoly and control of banking and financial services by few individuals or business houses
and to ensure compliance with regulations and promote the needs of the underprivileged and weaker sections
of society, cater to the needs of agriculture and other priority sectors and prevent concentration of wealth and
economic power. These banks play a revolutionary role in lending, particularly to the priority sector,
constituting of agriculture, small scale industries and small businesses. In India, there are 27 public sector
banks that have been nationalized by the government to protect the interests of majority of the citizens.
Some examples are State Bank of India, Union Bank of India etc. Public Sector banks can be further
classified as:

a. SBI & ASSOCIATED:

State Bank of India is the oldest and the largest bank of India. State Bank of India (SBI) is a multinational
banking and financial services company based in India. It is a government-owned Bank with its headquarters
in Mumbai, Maharashtra. As of December 2012, it had 15,003 branches, including 157 foreign offices,
making it the largest banking and financial services company in India by assets. Associates of State Bank of
India: SBI has five associate banks, which all use State Bank of India logo and "State Bank of" name,
followed by the regional headquarters' name. There has been a proposal to merge all the associate banks into
SBI to create a "mega bank" and streamline the group's operations which has not taken shape till date. The
current five associates are:

1) State Bank of Bikaner & Jaipur

2) State Bank of Hyderabad
3) State Bank of Mysore
4) State Bank of Patiala
5) State Bank of Travancore
b. NATIONALIZED BANK:

Even after Independence, there were many banks which were held privately. At that point of time, these
private banks mostly concentrated on providing financial services. By the 1960s, the Indian banking industry
has become an important tool to facilitate the development of the Indian economy. At the same time, it has
emerged as a large employer, and a debate has ensured about the possibility to nationalize the banking
industry. Government of India issued an ordinance and nationalized the 14 largest commercial banks with
effect from the midnight of July 19, 1969. Within two weeks of the issue of the ordinance, the Parliament
passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the
presidential approval on 9 August, 1969. Second step of nationalization of 6 more commercial banks
followed in 1980. The stated reason for the nationalization was to give the government more control of
credit delivery. With the second step of nationalization, the GOI controlled around 91% of the banking
business in India. Later on, in the year1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalized banks and resulted in the reduction of the
number of nationalized banks from 20 to 19.

c. OTHER PUBLIC SECTOR BANK

There are a total of 27 Public Sector Banks in India. The can be further classified as nationalized
banks(19) + SBI(1) & SBI Associates(5)+ Other Public Sector Banks (2). The rest two are IDBI Bank
and Bharatiya Mahila Bank, which are categorized as other public sector banks.
5. PRIVATE SECTOR BANK

The private-sector banks are banks where majority of their ownership is held by private shareholders and not
by the government. Private sector banks are owned, managed and controlled by private promoters and they
are free to operate as per market forces. To ensure their safety and smooth functioning there are generally
entry barriers and regulatory criteria set like the minimum net worth etc. This ensures safety of public
deposits entrusted with such institutions and they are also regulated by guidelines issued by Central Banks
from time to time. Some examples of private sector banks in India are ICICI Bank, Yes Bank and Axis
Bank. Private sector banks in India can be classified as Private Indian Banks & Private Foreign Banks.
Private Indian banks can be further classified as old and new private sector banks. They are defined below:

1) OLD PRIVATE SECTOR BANK

Not all private sector banks were nationalized in 1969, and 1980. The private banks which were not
nationalized are collectively known as the old private sector banks and include banks such as The Jammu
and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc.

2) NEW PRIVATE SECTOR BANK

Entry of private sector banks was however prohibited during the post-nationalization period. In July 1993,
as part of the banking reform process and as a measure to induce competition in the banking sector, RBI
permitted the private sector to enter into the banking system. This resulted in the creation of a new set of
private sector banks, which are collectively known as the new private sector banks. As at end March, 2009
there were 7 new private sector banks and 15 old private sector banks operating in India.

6. FOREIGN BANKS

Foreign banks have their registered and head offices in a foreign country but operate their branches in India.
The RBI permits these banks to operate either through branches; or through wholly-owned subsidiaries. The
primary activity of most foreign banks in India has been in the corporate segment. However, some of the
larger foreign banks have also made consumer financing a significant part of their portfolios. These banks
offer products such as automobile finance, home loans, credit cards, household consumer finance etc.
Foreign banks in India are required to adhere to all banking regulations, including priority-sector lending
norms as applicable to domestic banks. In addition to the entry of the new private banks in the mid-90s, the
increased presence of foreign banks in India has also contributed to boosting competition in the banking
sector.

7. REGIONAL RURAL BANK

The government of India set up Regional Rural Banks (RRBs) on October 2, 1975. These are the banking
organizations being operated in different states of India. They have been created to serve the rural areas with
banking and financial services. These banks support small and marginal farmers by extending credit to them
in rural areas. They cater to the credit needs of small and marginal farmers, agricultural labourers, artisans
and small entrepreneurs. The RRB's are sponsored by scheduled banks, usually a nationalized commercial
bank. Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring
public sector commercial bank. However, RRB's may have branches set up for urban operations and their
area of operation may include urban areas too. They are also referred to as Grameen Banks/ Gramin Banks.
Over the years, the Government has introduced a number of measures of improve viability and profitability
of RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a State. This
process of consolidation has resulted in a steep decline in the total number of RRBs to 56, as compared to
196 at the end of March 2005.

8. COOPERATIVE BANK

Cooperative banks are private sector banks. Co-operative banks are also mutual savings banks meant
essentially for providing cheap credit to their members. A cooperative bank is a voluntary association of
members for self-help and caters to their financial needs on a mutual basis. They accept deposits and make
mortgage and other types of loans to its members. These banks are also subject to control and inspection by
the Reserve Bank of India but they are generally governed by a different statue, which is more flexible and
easy to comply with compared to central bank acts. In India, they are governed by the provisions of State
Cooperative Societies Act. Another type is credit unions, which are cooperative organizations that issue
share certificates and make member (consumer) and other loans. These institutions are an important source
of rural credit i.e., agricultural financing in India. Co-operative banks get their resources from issuance of
their shares, accepting public deposits and also taking loans from the state cooperative banks. They also get
short and medium term loans from the Reserve Bank of India. To enhance safety and public confidence in
cooperative banks, the Reserve Bank of India has extended the Credit Guarantee Scheme to cooperative
banks. Cooperative banks can be further classified as:

1) State Co-operative Banks

2) Central Co-operative Banks
3) primary Agricultural Credit Societies
A.STATE COOPERATIVE BANK

At present, there are 31 state co-operative banks in India. State co-operative banks are part of the short-term
cooperative credit structure. These are registered and governed by state governments under the respective
co-operative societies acts of the concerned states. Since they are also covered by the provisions of the
Banking Regulation Act, 1949, they come under the control of the RBI as well. These banks are also
included in the Second Schedule of the RBI Act 1934.

B .CENTRAL COOPERATIVE BANKS

These banks are located at district headquarters or prominent towns. The accept deposits from public, have a
share capital and can take loans and advances from state co-operative banks. They perform banking
functions and fulfil the credit requirements of member societies.

C.PRIMARY AGRICULTURE CREDIT SOCIETIES

This is the smallest unit in the entire co-operative credit structure prevalent in India. It works at village level
and depends on central co-operative and state co-operative banks for its funding requirements. We currently
have more than 90000 credit society’s operative in India

9. SPECIALIZED BANK
Specialized banks are dedicated banks that excel in a particular product, service or sector and provide
mission-based services to a section of society. Some examples of specialized banks are industrial banks, land
development banks, regional rural banks, foreign exchange banks, and export-import banks etc. addressing
specific needs of these unique areas. These banks provide distinctive services or products like financial aid
to industries, heavy turnkey projects and foreign trade. Some specialized banks are discussed below:

A. Investment Banks:
Investment Banking teaser An investment bank is a financial institution that assists individuals, corporations
and governments in raising capital by underwriting and/or acting as the client's agent in the issuance of
securities. An investment bank may also assist companies involved in mergers and acquisitions, and provide
ancillary services such as market making, trading of derivatives, fixed income instruments, foreign
exchange, commodities, and equity securities. Investment banks aid companies in acquiring funds and they
provide advice for a wide range of transactions. These banks also offer financial consulting services to
companies and give advice on mergers and acquisitions and management of public assets.

B. Industrial Banks:
Industrial Bank banking teaser Industrial banks target to promote rapid industrial development. They provide
specialized medium and long term loans to industrial sector backed by consultancy, supervision and
expertise. They support industrial growth by rendering other services like project identification, preparation
of project reports, providing technical advice and managerial services etc. They also do underwriting of
public issues by corporate sector or help industrial units get finance through consortium or provide guarantee
to other financial institutions. We have a number of such banks in India like Industrial Development Bank of
India (IDB), Industrial Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of
India Ltd. (ICICI), Industrial Reconstruction Bank of India (IRBI), etc.

C. Retail Banks

Banking Retail Banks teaser Retail banks provide basic banking services to individual consumers. Examples
include savings accounts, recurring and fixed deposits and secured and unsecured loans. Products and
services offered by retail banks include safe deposit boxes, checks and savings accounting, certificates of
deposit (CDs), mortgages, consumer and car loans, personal credit cards etc. Retail Banks can be further
classified as:
1) Community Development Banks

Provide services to underserved markets or populations, example Rural Banks in India, generally
incentivized and regulated by the government.

2) Private Banks:

Some private retail banks manage the assets of high-net-worth individuals and provide specialized services
like wealth management

3) Savings Banks:

These are deposit oriented branches, also could be an extension counter of an existing bank branch that
accept savings deposits and provide basic banking

4) Postal savings Banks:

Postal banks are the banks operated and controlled by National Postal Departments and provide basic
banking services to retail customers. These banks are very effective in small towns and villages and provide
financial inclusion to a section of society which otherwise would not have been catered by other banks.

5) Land Development Banks:

 Land Development banking teaser these banks support the development of agriculture and land. They
provide long-term credit to agriculture for purposes such as pump sets, tractors, digging up wells, land
improvement, etc. These banks get funding by issuing debentures, which are generally subscribed by the
State Bank Group, other commercial banks, LIC and Reserve Bank of India. These banks grant loans to
farmers against the security of their land

10. IMPORT AND EXPORT BANK:

EXIM Banking teaser Import-Export banks are generally setup by government like central banks to promote
trade activities in import and export. They support exporters and importers by providing financial assistance,
acting as principal financial institution, coordinating working of other institutions engaged in export and
import to facilitate the growth of international trade. They provide traditional export finance and also do
financing of export oriented units. The bank finances and insures foreign purchases of goods for customers
unable or unwilling to accept credit risk. Some examples are Export-Import Bank of India (Exim Bank),
Export–Import Bank of the United States etc.

1.8 FRAUDS IN BANKS

1.8.1 INTRODUCTION

Frauds is defined as any behaviour by which a person intended to gain a dishonest advantage over another.in
other word, frauds is an act or omission which is intended to cause wrongful gain to one person and
wrongful loss to the other; either by way of concealment of facts or otherwise. Bank fraud is the use of
potentially illegal means to obtain money, assets, or other property owned or held by a financial institution,
or to obtain money from depositors by fraudulently posing as a bank or other financial institution. In many
instances, bank fraud is a criminal offence. One of the most important responsibilities that a bank or
financial institution has is to protect the integrity of the institution by working hard to protect the financial
assets that it holds. In order to do so, the bank or financial institution must be certain to address the issue of
bank fraud. Bank fraud can be defined as an unethical and/or criminal act by an individual or organization to
illegally attempt to possess or receive money from a bank or financial institution. Let's take a look at several
types of bank fraud which exist, followed by how these types of activities can be prevented.

1.8.2 DEFINATION OF BANK FRAUDS

Section 421 Indian penal code defines “frauds” as ‘who ever dishonestly or fraudulently removes,
conceal or delivers to any person, or transfers or causes to be transferred to any person without adequate
consideration, any property ,intending thereby to prevent, or knowing it to be likely that he will thereby
prevent, the distribution of that property according to law among his creditors or the creditors of any other
person, shall be punished with imprisonment of either description for a term which may extend to two years
or with fine or with both.

Under section 17 as per Indian contract act:

A fraud mean and includes any of the following act committed by a contract, or with his connivance or by
agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract:

I. The suggestions as a fact of that which is not true or by one who does not believe it to be true
II. The active concealment of a fact by one having knowledge or belief of the fact
III. A promise made without any intension of performing it
IV. Any other act fitted to deceive; and
V. Any such act or omission as the law specially declares to be fraudulent

However, mere silence as to the facts likely to affect the willingness of a person into a contract is not
frauds unless there is a duty to speak or his silence is , itself, equivalent to speech.

1.8.3 TYPES OF BANK FRAUDS:

 1. Accounting fraud

In order to hide serious financial problems, some businesses have been known to use fraudulent
bookkeeping to overstate sales and income, inflate the worth of the company's assets, or state a profit when
the company is operating at a loss. These tampered records are then used to seek investment in the
company's bond or security issues or to make fraudulent loan applications in a final attempt to obtain more
money to delay the inevitable collapse of an unprofitable or mismanaged firm. Examples of accounting
frauds: Enron and World Com and Ocala Funding. These companies "cooked the books" in order to appear
as though they had profits each quarter, when in fact they were deeply in debt.

2. Demand draft fraud

Demand draft (DD) fraud typically involves one or more corrupt bank employees. Firstly, such employees
remove a few DD leaves or DD books from stock and write them like a regular DD. Since they are insiders,
they know the coding and punching of a demand draft. Such fraudulent demand drafts are usually drawn
payable at a distant city without debiting an account. The draft is cashed at the payable branch. The fraud is
discovered only when the bank's head office does the branch-wise reconciliation, which normally take six
months, by the time the money is gone.

3. Bill discounting fraud

Essentially a confidence trick, a fraudster uses a company at their disposal to gain the bank's confidence, by
posing as a genuine, profitable customer. To give the illusion of being a desired customer, the company
regularly and repeatedly uses the bank to get payment from one or more of its customers. These payments
are always made, as the customers in question are part of the fraud, actively paying any and all bills the bank
attempts to collect. After the fraudster has gained the bank's trust, the company requests that the bank begin
paying the company up front for bills it will collect from the customers later. Many banks will agree, but are
not likely to go whole hog right away. So again, business continues as normal for the fraudulent company,
its fraudulent customers, and the unwitting bank. As the bank grows more comfortable with the arrangement,
it will trust the company more and more and be willing to give it larger and larger sums of money up front.
Eventually, when the outstanding balance between the bank and the company is sufficiently large, the
company and its customers disappear, taking the money the bank paid up front and leaving no-one to pay the
bills issued by the bank.

4. Duplication or skimming of card information

This takes a number of forms, ranging from merchants copying clients' credit card numbers for use in later
illegal activities or criminals using carbon copies from old mechanical card imprint machines to steal the
info, to the use of tampered credit or debit card readers to copy the magnetic stripe from a payment card
while a hidden camera captures the numbers on the face of the card. Some fraudsters have attached
fraudulent card stripe readers to publicly accessible ATMs, to gain unauthorised access to the contents of the
magnetic stripe, as well as hidden cameras to illegally record users' authorisation codes. The data recorded
by the cameras and fraudulent card stripe readers are subsequently used to produce duplicate cards that could
then be used to make ATM withdrawals from the victims' accounts.

5. Cheque kiting

Cheque kiting exploits a banking system known as "the float" wherein money is temporarily counted twice.
When a cheque is deposited to an account at Bank X, the money is made available immediately in that
account even though the corresponding amount of money is not immediately removed from the account at
Bank Y at which the cheque is drawn. Thus both banks temporarily count the cheque amount as an asset
until the cheque formally clears at Bank Y. The float serves a legitimate purpose in banking, but
intentionally exploiting the float when funds at Bank Y are insufficient to cover the amount withdrawn from
Bank X is a form of fraud.

6. Fraudulent Use of Bank Document

Fraudulent use of a valid bank document such as statement-sheet belonging to different customers, bank
letterhead paper, bank rubber-stamp, bank seal etc. are acts of fraud

7. Forgery and altered cheques

Fraudsters have altered cheques to change the name (in order to deposit cheques intended for payment to
someone else) or the amount on the face of cheques, simple altering can change $100.00 into $100,000.00.
(However, transactions for such large values are routinely investigated as a matter of policy to prevent
fraud.) Instead of tampering with a real cheque, fraudsters may alternatively attempt to forge a depositor's
signature on a blank cheque or even print their own cheques drawn on accounts owned by others, non-
existent accounts, etc. They would subsequently cash the fraudulent cheque through another bank and
withdraw the money before the banks realise that the cheque was a fraud.

8. Fraudulent loan applications

These take a number of forms varying from individuals using false information to hide a credit history filled
with financial problems and unpaid loans to corporations using accounting fraud to overstate profits in order
to make a risky loan appear to be a sound investment for the bank.

9. Fraudulent loans:

One way to remove money from a bank is to take out a loan, which bankers are more than willing to
encourage if they have good reason to believe that the money will be repaid in full with interest. A
fraudulent loan, however, is one in which the borrower is a business entity controlled by a dishonest bank
officer or an accomplice; the "borrower" then declares bankruptcy or vanishes and the money is gone. The
borrower may even be a non-existent entity and the loan merely an artifice to conceal a theft of a large sum
of money from the bank. This can also be seen as a component within mortgage fraud (Bell, 2010).
 10. Money laundering:

The term "money laundering" dates back to the days of Al Capone; Money laundering has since been used to
describe any scheme by which the true origin of funds is hidden or concealed. Money laundering is the
process by which large amounts of illegally obtained money (from drug trafficking, terrorist activity or other
serious crimes) is given the appearance of having originated from a legitimate source

11. ATM Fraud

ATM fraud refers to fraud with the use of an ATM card, whereby the perpetrator of the crime uses the card
to immediately withdraw funds from a customer-account using Personal Identification Number (PIN)-based
transactions at the ATM location. The common method adopted to get an ATM card by such perpetrator is to
steal a customer’s card. ATM fraud includes everything from reprogramming the machine to installing a
skimmer to steal card details.

12. Cyber Fraud

This refers to a situation wherein someone uses the Internet to get money, goods etc. from people illegally
by tricking them. Not only does cyber fraud inflict losses on the cardholders, but also the merchants,
merchants’ banks and card issuers. Cyber fraud continues to be an unending botheration for banks. While the
focus of attempts and attacks, until recently, tended to be on the bank’s customers (via card and account
detail compromises), of late fraudsters have become more sophiscated and have raised the stakes. They have
shifted their focus and are now directly targeting banks. One area where fraudsters have increased malicious
attacks is Correspondent Banking, especially via SWIFT. They have begun deploying increasingly
Sophisticated methods of circumventing individual control in the banks’ local environments, and have
probed deeper into systems to execute well-planned and timely orchestrated attacks.

13. Payment card fraud:

Credit card fraud is widespread as a means of stealing from banks, merchants and clients.

14. Booster cheques:

A booster cheque is a fraudulent or bad cheque used to make a payment to a credit card account in order to
"bust out" or raise the amount of available credit on otherwise-legitimate credit cards. The amount of the
cheque is credited to the card account by the bank as soon as the payment is made, even though the cheque
has not yet cleared. Before the bad cheque is discovered, the perpetrator goes on a spending spree or obtains
cash advances until the newly-"raised" available limit on the card is reached. The original cheque then
bounces, but by then it is already too late.

15. Stolen payment cards:

Often, the first indication that a victim's wallet has been stolen is a phone call from a credit card issuer
asking if the person has gone on a spending spree; the simplest form of this theft involves stealing the card
itself and charging a number of high-ticket items to it in the first few minutes or hours before it is reported as
stolen. A variant of this is to copy just the credit card numbers (instead of drawing attention by stealing the
card itself) in order to use the numbers in online frauds.

16. Phishing and Internet fraud:

Phishing, also known as Internet fraud, operates by sending forged e-mail, impersonating an online bank,
auction or payment site; the e-mail directs the user to a forged web site which is designed to look like the
login to the legitimate site but which claims that the user must update personal info. The information thus
stolen is then used in other frauds, such as theft of identity or online auction fraud. A number of malicious
"Trojan horse" programmes have also been used to snoop on Internet users while online, capturing
keystrokes or confidential data in order to send it to outside sites. Fake websites can trick you into
downloading computer viruses that steal your personal information. Security messages are shown that tell
you that you have viruses and need to download new software, by doing this you are tricked into
downloading an actual virus.

17. Prime bank fraud:

The "prime bank" operation which claims to offer an urgent, exclusive opportunity to cash in on the best-
kept secret in the banking industry, guaranteed deposits in "prime banks", "constitutional banks", "bank
notes and bank-issued debentures from top 500 world banks", "bank guarantees and standby letters of credit"
which generate spectacular returns at no risk and are "endorsed by the World Bank" or various national
governments and central bankers. However, these official-sounding phrases and more are the hallmark of the
so-called "prime bank" fraud; they may sound great on paper, but the guaranteed offshore investment with
the vague claims of an easy 100% monthly return are all fictitious financial instruments intended to defraud
individuals.

18. Empty ATM envelope deposits:

A criminal overdraft can result due to the account holder making a worthless or misrepresented deposit at
an automated teller machine in order to obtain more cash than present in the account or to prevent a check
from being returned due to non-sufficient funds. United States banking law makes the first $100
immediately available and it may be possible for much more uncollected funds to be lost by the bank the
following business day before this type of fraud is discovered. The crime could also be perpetrated against
another person's account in an "account takeover" or with a counterfeit ATM card, or an account opened in

another person's name as part of an identity theft scam. The emergence of ATM deposit technology that
scans currency and checks without using an envelope may prevent this type of fraud in the future.

19. The fictitious bank inspector:

This is an old scam with a number of variants; the original scheme involved claiming to be a bank inspector,
claiming that the bank suspects that one of its employees is stealing money and that to help catch the culprit
the "bank inspector" needs the depositor to withdraw all of his or her money. At this point, the victim would
be carrying a large amount of cash and can be targeted for the theft of these funds. Other variants included
claiming to be a prospective business partner with "the opportunity of a lifetime"

then asking for access to cash "to prove that you trust me" or even claiming to be a new immigrant who
carries all their money in cash for fear that the banks will steal it from them – if told by others that they keep
their money in banks, they then ask the depositor to withdraw it to prove the bank hasn't stolen it.
Impersonation of officials has more recently become a way of stealing personal information for use in theft
of identity frauds.

1.9 EFFECT OF BANK FRAUDS

1.9.1EFFECT OF BANK FRAUDS ON CUSTOMER:

 Loss of Confidence
Bank fraud discourages banking habits among the banking public. It raises the question of how reliable are
banks to trust one’s money with them. The ethics of the banking profession which are honesty, reliability
and competence are fading away. It is disheartening to note that the successful prevention of a particular
fraud gives rise to a more complex and sophiscated one by the perpetrators; and the category of staff
involved are increasingly those of high rank. This brings a great concern to the society

 Considerable Time and Emotional Losses

Bank customers also experience considerable time and emotional losses which damage a banker customer
relationship because of shattered trust and confidence. This will, in turn, increase dissatisfaction because of a
perceived service failure. Customers might develop a wrong perception as a result of their negative
experience, that the bank is not safe and is incapable of protecting its clients’ assets.

1.9.2 Effect of Fraud on the Banking Industry

Banks all over the world have through their unique position in their economies contributed immensely to the
economic growth and development of nations. Therefore, any problem that tends to hinder their operation,
such as fraudulent practices, is viewed with seriousness. For some time now, the Ghanaian banking system
has suffered from fraudulent practices perpetrated by bank employees – people outside the bank as well as
corporate bodies
 In the first place, fraud results in huge financial losses to banks and such losses affect the profit level
of banks which would have been available for distribution to shareholders. Losses from fraud which
are absorbed by the equity capital of a bank impair the bank’s financial health, affect
  Liquidity position, and constrain the bank’s ability to extend loans and advances for profitable
operations. Fraud reduces organisational assets and increases its liabilities, which impede the going-
concern status of the bank.
 In extreme cases, rampant and large incidence of fraud could lead to a bank’s failure (i.e. the collapse
or liquidation of a bank due to inability to meet deposition obligations or technical bank eligibility
standards prescribed by the central bank).
 Fraud can increase the operating cost of a bank because of the added cost in installing the necessary
machinery for its detection, prevention and protection of assets.
 Moreover, devoting valuable time to safeguarding its assets from fraudulent people distracts
management. This unproductive diversion of resources reduces output and lowers profit, which in
turn could retard growth of the bank.
 Today, various banks cannot withstand the growing pressure of competition among various
competitors due to a monster called bank fraud. Equally, the confidence placed on banks is fast
eroding because some people now prefer keeping their money at home instead of keeping it in the
banks. The fear is that if this act is not arrested, people might not find it wise to transact business via
our banks.
 Fraud damages a bank’s credibility, endangers a bank’s plan and strategies, reduces operational
efficiency, increases public criticisms, loses customer confidence and considerably damages the
bank’s reputation.
 Trust and understanding among co-workers, managers and other bank team members is reduced or
weakened by acts of fraud and other financial malpractices. Trust increases slowly over time through
repeated interactions. However, trust can dissolve in moments from just one bad criminal activity.

Trust is a key component in a healthy work environment. In banking institutions where trust work-
relationships exist, more work gets done. Team member’s work together collaborates. There is job
satisfaction, high morale, high job rotation and low absenteeism because trust buffers high stress levels.

1.9.3 Effect of Bank Fraud on the Economy

Fraud in the banking sector has considerable influence on the level of bank performance, which in the long
run also impacts negatively on both micro and macro levels of the economy. The banking industry is the
essential prerequisite to a robust economy; hence, the basic aim of a bank’s management to curtail fraud as
well as the actual losses in the banking sector needs adequate mechanisms to be put in place. If banking
operations are strong, then the economy is better able to withstand negative social impact as a result of fraud.
The banking industry’s importance in any country stems from its role of financial mobilisation from surplus
to deficit unit, provision of a competent payment system, and facilitating the implementation of monetary
policies. The banking industry is one of the most important sectors in the economy, with wide effects on the
level and direction of economic growth, transformation; and on such economic variables as the rate of
unemployment and inflation which directly.

1.10 PUNJAB NATIONAL BANK

1.10.1 INTRODUCTION
Punjab National Bank (PNB) is a Banking and Financial service bank owned by Government of India. Its
headquarter is in New Delhi, India. The bank was founded in 1894. As of June 2019, the bank has over 115
million customers, 7,036 branches and 8,906 ATMs. PNB has a banking subsidiary in the UK (PNB
International Bank, with seven branches in the UK), as well as branches in Hong Kong, Kowloon, Dubai,
and Kabul. It has representative offices in Almaty (Kazakhstan), Dubai (United Arab
Emirates),Shanghai (China), Oslo (Norway), and Sydney (Australia). In Bhutan it owns 51% of Druk PNB
Bank, which has five branches. In Nepal PNB owns 20% of Everest Bank Limited, which has 50 branches.
Lastly, PNB owns 41, 64 % of JSC (SB) PNB Bank in Kazakhstan, which has four branches. PNB is going
to be the second largest public sector Bank after merger of two banks United Bank of India and OBC Bank
into it from first of April 2020. Cabinet approval for the merger is still awaited. Presently PNB is third
largest public sector Bank after SBI and Bank of Baroda. As on 31 March 2015, the bank had 68,290
employees. As of 31 March 2013, it also had 919 employees with disabilities on the same date (1.45%).The
average age of bank employees on the same date was 46 years. The bank reported business of INR 11.65
crores per employee and net profit of INR 8.06 lakhs per employee during the FY 2012–13. The company
incurred INR 5,751 crores towards as on 31 March 2015, the bank had 68,290 employees. As of 31
March2013, it also had 919 employees with disabilities on the same date (1.45%). The average age of bank
employees on the same date was 46 years. The bank reported business of INR 11.65 crores per employee
and net profit of INR 8.06 lakhs per employee during the FY 2012–13. The company incurred INR 5,751
crores towards employee benefit expenses during the same financial year. Expenses during the same
financial year.

1.10.2. HISTORY

Punjab National Bank is a PSU working under Central Government of India regulated by Reserve Bank of
India, Act, 1934 and Banking Regulation Act, 1949. Punjab National Bank was registered on 19 May 1894
under the Indian Companies Act, with its office in Anarkali Bazaar, Lahore, in present-day Pakistan. The
founding board was drawn from different parts of India professing different faiths and of varying back-
ground with, the common objective of creating a truly national bank that would further the economic interest
of the country. PNB's founders included several leaders of the Swadeshi movement such as Dyal Singh
Majithia and Lala Harkishen Lal, Lala Lalchand, Kali Prosanna Roy, E. C. Jessawala, Prabhu Dayal, Bakshi
Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management of the
Bank in its early years. The board first met on 23 May 1894. The bank opened for business on 12 April 1895
in Lahore. PNB is the first Indian bank to have been started solely with Indian capital that survives to the
present - the earlier Oudh Commercial Bank was established in 1881, but failed in 1958. Mahatma
Gandhi, Jawahar Lal Nehru, Lal Bahadur Shastri, Indira Gandhi and the Jalianwala Baugh Committee have
held PNB accounts.

In 1900 PNB established its first branch outside Lahore in India. Branches
in Karachi and Peshawar followed. The next major event occurred in 1940 when PNB absorbed Bhagwan
(or Bhugwan) Dass Bank, which had its head office in Dehra At the Partition of India and the
commencement of Pakistani independence, PNB lost its premises in Lahore, but continued to operate in
Pakistan. Partition forced PNB to close 92 offices in West Pakistan, one-third of its total number of
branches, and which held 40% of the total deposits. PNB still maintained a few caretaker branches. On 31
March 1947, even before Partition, PNB had decided to leave Lahore and transfer its registered office to
India; it received permission from the Lahore High Court on 20 June 1947, at which time it established a
new head office at Under Hill Road, Civil Lines in New Delhi. Lala Yodh Raj was the Chairman of the
Bank.

In 1951, PNB acquired the 39 branches of Bharat Bank (est. 1942). Bharat Bank became Bharat Nidhi Ltd.
In 1960, PNB again shifted its head office, this time from Calcutta to Delhi. In 1961, PNB acquired

Universal Bank of India, which Ramakrishna Jain had established in 1938 in Dalmianagar, Bihar. PNB also
amalgamated Indo Commercial Bank (est. 1932 by S. N. N. Sankaralinga Iyer) in a rescue. In 1963,
The Burmese revolutionary government nationalized PNB's branch in Rangoon (Yangon). This became
People's Bank No. 7. After the Indo-Pak war, in September 1965 the government of Pakistan seized all the
offices in Pakistan of Indian banks. PNB also had one or more branches in East Pakistan (Bangladesh).
The Government of India (GOI) nationalized PNB and 13 other major commercial banks, on 19 July 1969.
In 1976 or 1978, PNB opened a branch in London. some ten years later, in 1986, the Reserve Bank of
India required PNB to transfer its London branch to State Bank of India after the branch was involved in a
fraud scandal. That same year, 1986, PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The
acquisition added Hindustan's 142 branches to PNB's network. In 1993, PNB acquired New Bank of India,
which the GOI had nationalized in 1980. In 1998 PNB set up a representative office in Almaty, Kazakhstan.

In 2003 PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the time of the merger
with PNB, Nedungadi Bank's shares had zero value, with the result that its shareholders received no payment
for their shares. PNB also opened a representative office in London. In 2004, PNB established a branch
in Kabul, Afghanistan, a representative office in Shanghai, and another in Dubai. PNB also established an
alliance with Everest Bank Limited in Nepal that permits migrants to transfer funds easily between India and
Everest Bank's 12 branches in Nepal. Currently, PNB owns 20% of Everest Bank. Two years later, PNB
established PNBIL – Punjab National Bank (International) – in the UK, with two offices, one in London, and
one in Southall. Since then it has opened more branches, this time in Leicester, Birmingham, Ilford,
Wembley, and Wolverhampton. PNB also opened a branch in Hong Kong. In January 2009, PNB
established a representative office in Oslo, Norway. PNB hopes to upgrade this to a branch in due course. In
January 2010, PNB established a subsidiary in Bhutan. PNB owns 51% of Druk PNB Bank, which has
branches in Thimpu, Phuentsholing, and Wangdue. Local investors own the remaining shares. Then on 1
May, PNB opened its branch in Dubai's financial centre. PNB purchased a small minority stake in
Kazakhstan-based JSC Dana bank established on 20 October 1992 in Pavlodar. Within the year PNB
increased its ownership till 84% of what has become JSC (SB) PNB, with its share currently decreased to
49%. The associate in Kazakhstan now called JSC Tengri Bank has branches
in Almaty, NurSultan, Karaganda, Pavlodar and Shymkent. September 2011: PNB opened a representative
office in Sydney, Australia. December 2012: PNB signed an agreement with US based life Insurance
company MetLife to acquire a 30% stake in MetLife's Indian affiliate MetLife India Limited. The company
would be renamed PNB MetLife India Limited and PNB would sell MetLife's products in its branches.

1.10.3 MERGERS AND ACQUISITION

SR.NO ACQUISITION COMPANY LOCATION

1. 1951 Bharat bank India New Delhi India
2. 1961 Universal Bank of Dalminagar Bihar,
India India
3. 196 Indo-commercial bank India

4. 1986 Hindustan commercial India

Bank
5. 1993 New bank of India New Delhi India
6. 2003 Neungadi Bank Kozhikode Kerala
India
7. 1-04-2020 Proposed Oriental bank of
merger commerce and United
bank of India
On 30 August 2019, Finance Minister Nirmala Sitharaman announced that the Oriental Bank of Commerce
and United Bank of India would be merged with Punjab National Bank. The proposed merger would make
Punjab National Bank the second largest public sector bank in the country with assets of ₹17.95 lakh crore
(US$250 billion) and 11,437 branches. MD and CEO of United Bank, Ashok Kumar Pradhan, stated that the
merged entity would begin functioning from 1 April 2020 and would operate under a new name. Recently
PNB announced that there is no plan to change the name of Bank after merger.

1.10.4 PUNJAB NATIONAL BANK SCAM

PNB employees (54 officials) issued the fake Letter of Undertakings (LOU) which could lead to fund
NOSTRO account of PNB by the Axis and Allahabad bank (Hong Kong branches). Where this NOSTRO
account of PNB could fund to overseas parties including that of Nirav Modi. (Roy, Kalra, & Rocha, 2018)
The two employees of PNB directly used SWIFT and while doing it, they did not pay attention on the core
banking system (CBS).The FIR contained the details like those two PNB employees were issuing LOUs in
unauthorized way from last 7 years. Afterwards, one of them retired and the new employee came on his
designation. In January, when the officials of firm demanded fresh LOUs from PNB, the new PNB officer
asked for the collateral security. The officials of firm mentioned that this had been never asked by the PNB
manager in the last 7 years. Now the bank got signal that something wrong has been taken place. The new
Bank officer got doubt on the past 7 years LOU issuance and he looked into the concerned matter in detail.
After detail investigation, it found near about 100 LOUs issued to these firms without asking for collateral
security. PNB became the victim of the fraud. It faced the problem amounting to about 11,400 crores. The
PNB reported to the RBI and CBI. Modi needed money to import pearls & diamonds. He wanted to have
foreign currency loan and his earning through exporting was in foreign currency. The most important thing
is that he wanted to borrow without his loan account. Hence, he arranged LOU from the PNB to get cheap
buyer’s credit in foreign currency, which is for a short term. Ideally, Modi should have exported the pearls,
diamonds & use the earnings for settling the due amount of LOU as & when demanded by the bank
according to its standard procedure. Further, PNB need to have paid back the loan it has risen in its
NOSTRO account from the overseas banks. But he utilized the money for other purposes without paying it
to the bank. These activities were happening from last 7 years. Rather Modi Employees had attention on it.
There was no linkage of SWIFT to CORE system. (Bandopadhyay, 2018) According to the FIR, SWIFT
messages were issued to Allahabad bank and Axis Bank in Hong Kong. (Krishna, 2018) Nirav Modi was a
diamond jewellery designer. According to Forbes, his rank was 57th among the billionaire list of 2017. He
was the Founder of chain of diamond jewellery retail stores. (Lall, 2019). Used to pay back the principal &
interest on old LOU by new one. The total Lou’s taken by Nirav Modi & Mehul Choksi stood out at 293
according investigating agencies detail. In this way the cycle of fraud was repeating. Mr. Gopalnath Shetty,
who was been working at foreign exchange department of the PNB branch in Mumbai since 31 March 2010,
and his colleagues were allegedly using SWIFT system and no other

1.10.5 How banking process converted in to scam?

LOU is the form of bank guarantee under which bank can borrow money from the bank branch of overseas
Indian bank. Due to this, its customer is getting money from another Indian bank’s foreign branch in the
form of buyer’s credit. This was a case of operational risk. It was the fault of the PNB employees who
wanted to make faulty procedure of issuing LOUs for their own benefit. The SWIFT had bypassed the CBS.
There was no internal coordination and also no proper monitoring which resulted in operation. Majorly, the
internal banking system was exposed to fraudulent activities. It is must to use the standard operating system
for prompt and clean banking. It was the responsibility of external as well as internal auditor to trace the
transaction also contingent liability figure or the other question arises whether those auditors were also
involved or not. Concurrent auditors whose job is of transaction verification. They couldn’t notice the case at
that time was big question. Hence, all auditors like concurrent, internal and statutory were failed in finding
out the problem. Linking CBS with SWIFT wasn’t made mandatory by Reserve Bank of India. Hence, many
banks until now were no linking between two. Same case happened in case of Nirav Modi. But if the
company wants to take on some currency risk, it can reduce its interest rate risk. So, the company demands
bank guarantee to the bank of its relation in its home-country (in this case-India)and it goes to offshore
branch of another Indian bank and borrows loan at lower interest by showing those bank guarantees. For the
company, it was getting cheap and prompts credit. For overseas Indian bank, it would get low risk payment
by Indian guarantee issuing bank while for Indian bank, it gets fees for such issuance of LOUs. The most
important factor of operational risk was that one of the employees who had got access to SWIFT was the
main person behind the fraud. He used the system in wrongful way. The credit quality of the borrower is also
important but, in many cases, due to trust factor on local bank, the overseas Indian banks loans provides
buyer credit without much scrutiny of the credit quality of the borrower. (Dugal, 2018) The first SWIFT
message was MT799 which was delivered to the overseas branches of Indian banks. The LOU issuing bank
has NOSTRO account (account in the foreign currency) with the overseas bank branch. When they got
SWIFT message, they promptly deposited foreign currency amount in the NOSTRO account of PNB.

1.10.6 Impact of scam

On stock market NIFTY and SENSEX are majorly influenced by banking sector. Due to this type of scam,
investors lose confidence in investing and he doubts about the transparency of the business in the country.
The overall perception of the investor towards financial sector of the country changed. Strict norms and
actions by the Indian banking sector after such incidences also hamper on trade financing (How will the
PNB fiasco impact the equity markets?) This fraud impacted on the customer as the customers wanted to
know the position of their deposited money while the bank was instilling confidence among them that it will
be honouring its commitments. (Tiwari, 2018) The scam had also impacted banks. Out of the 39 banks
which are listed one, 34 listed bank’s share price fell between February 12 and February 15, 2018 while
benchmark BSE index lost 1.2 per cent. There are five banks like Union Bank of India, SBI, UCO bank, and
Axis Bank, Allahabad Bank. That has been directly affected by the scam as they had offered short term
buyer’s credit to PNB (Sarkar, 2018). The scam had also impacted banks. Out of the39 bank which are
listed one, 34 listed bank’s share price fell between February 12 and February 15, 2018 while bench mark
BSE Index lost 1.2%. there are five banks like Union bank of India, UCO bank, Axis bank , Allahabad bank
That have been directly affected by the scam as they had offer short term buyer’s credit to PNB.

The fraud had its impact on Life Insurance Corporation (LIC) and which was the single biggest investor &
it lost Rs 1,400 crore over the last three trading sessions. The fraud has severe impact on buyer credit to the
SMEs as SMEs require the credit for its growth but due to banning of Letter of Undertakings (LOUs) and
Letter of Comfort (LCs) and the other credit options like Letter of Credit are expensive option, the SMEs
are falling short of credit because of the move by the regulator and strict autonomous opinion of the
individual banks. In this way, SMEs have severe impact of the scam by the billionaire. (Our Bureau, 2018)

After the scam details were made public, the stock of the bank went down by 10%. PNB’s gross NPAs
rose to18.26% of advances as on June 30, 2018 as against 13.66% in the same quarter a year ago. Net NPAs
rose to 10.58% against 8.67%. By the second quarter of the fiscal (2017-18), the bad loans of the PSBs had
reached INR 7.34 lakh crore (compared with the INR 1.03 lakh crore of the private sector banks)

Also, this bank crisis had impact on the currency exchange rate as PNB scam led out to Also; this bank
crisis had impact on the currency exchange rate as PNB scam led out to fall in the exchange rate.

To jewellery sector-The fraud has led to drop the bank finance to the jewellery sector by 10% while bank
finance is the most important factor in the jewellery sector. As the small businessman in this sector is not
able to get the bank credit, there is fall in the export level also.
 CHAPTER II

RESEARCH METHODOLOGY

2.1. Introduction

It involves the collection, organization, and analysis of information to increase our understanding of a topic
or issue .A research project may also be an expansion on past work in the field. Research projects can be
used to develop further knowledge on a topic, or in the example of a school research project, they can be
used to further a student's research prowess to prepare them for future jobs or reports. To test the validity of
instruments, procedures, or experiments, research may replicate elements of prior projects or the project as a
whole.

2.2 Objective of the study

 To analyse the Punjab National Bank frauds.

 To study the impact of scam on stock market, banking sector and jewellery sector.
 To study the impact of scam on PNB rating given by various Indian and global rating agencies.

2.3 Scope of the study

Frauds impact banking sector in several areas including financially, operationally and physiologically while the
monitory loss can be staggering. Its loss of reputation, goodwill and customer relations can be divesting. As fraud can
be perpetrated by any employee within a banking sector or those by outside it, it is important for companies to have an
effective fraud management program in place to safeguard their assets and reputation

2.4 Research Methodology

Research methodology is the specific procedures or techniques used to identify, select, process, and analyse
information about a project topic.

2.5 DATA COLLECTION

Here the data/information is collected through secondary method of data collection. Data collection is an
extremely challenging work which needs exhaustive planning, diligent work understanding, determination
and more to have the capacity to complete the assignment effectively. Data collection begins with figuring
gather the data from the chosen sample.

 PRIMARY DATA-

As the name suggests, are first-hand information collected by the surveyor. The data so collected are
pure and original and collected for specific purpose. They have never undergone any statistical
treatment before. The collected data may be published as well. The census is an example of primary
data.

 SECONDARY DATA -

Secondary data are opposite to primary data. They are collected and published already (by some
organisation, for instance). They can be used as a source of data and used by surveyors to collect data
from and conduct analysis. Secondary data are impure in the sense that they have undergone
statistical treatment at least once.

This study used the secondary data to analysis and interpretation of Punjab national bank
scam. Data is collected from various sources such as financial reports, Reserve bank of India
reports on banks and obtaining information net surfing.
 CHAPTER III

REVIEW OF LITERATURE

Gurbachan singh (2018)1 explained that nowadays banks have incurred humongous losses in India. At the
margin there is much greater and urgent need to improve the economic risk. The non-performing assets in
banking sector in India are humongous by 2014.15% of state bank loans had gone bad. In fact regulators
banks, government of India are face with some issues. Government of India has recapitalised public sector
bank to the extent of RS.2.11 trillion. The corrective measures are taken to avoid the frauds and improving
audit process.

S. Gayathri (2018)2explained that PNB scam comes huge blow to the entire banking sector. The magnitude
of PNB scam is very exorbitant and it has been happening more than five years undetected. The RBI facing
public wrath for not detect the largest banking scam. This paper aims to identify and analyse the factors that
led to massive scam. This paper also delves into auditing process of bank and possible loop holes that led to
the fraud and summarizes the impact of scam on various banking sector and the whole economy.

Saheb Chhabra et al (2017)3 analysed that technological advancements enable criminal actors to perpetrate
innovative frauds that are very difficult to detect. One example is use erasable ink that allows alteration to be
made to a bank check without raising suspicion misuse of victim’s handwritten signature by scanning it
&then printing on check. Most of the banking systems accept scanned copies of checks for
clearance, Identifying erasable ink alterations and printed signatures on digital images can be very
challenging. A solution for detecting erasable ink alteration localise the regions in the visible light
spectrum and detecting printing signature focuses on the high density noise introduced by scanner and
printer.

Shaila Chaudhary (2017) 4 explained that an attempt was made to analyse the group wise banker’s
viewpoint towards the risk of frauds in public &private sector Indian banks. A sample of 440 bank’s
official is taken on basis of judgement sampling i.e. 120 from private sector bank. The primary data were
collected. It found that poor security of record, hard ware and softer ware is most significant factors
responsible for frauds. It is recommended that there should be clear organisational structure written
policies, procedure & fair employment practice to prevent frauds.

M. Bhasin (2016)5 explained that growing banking industry in India frauds in bank are also increasing. As
a part of study the researcher do questionnaire based survey was conducted. The study revealed that there
are poor employees training and although banks cannot be 100% secure against threats. In 2015 RBI has
introduced new mechanism for banks to check loan frauds by taking pro-active steps by setting up central
frauds registry introduced the concept of red flagged account & investigative agencies will soon start
sharing their database with banks.

Kehinde Adekunle et al (2016) 6 examine that frauds preventing in banking industry adopting both primary
& secondary data. Primary data was used to test internal control while the secondary data were employed to
test frauds prevention. In researcher said that the internal control on its own is effective against fraud, but not
all staff is committed to it while the secondary data quit supportive. The paper recommends the continuation
of the cashless policy of the central banking to reduce available cash and improvement in educated staff to
reduce frauds.

Charan singh et al (2016) 7 explained that the Indian banking sector has experience considerable growth
and changes since liberalisation of economy in1991. The researcher study indicates various frauds such as
banking frauds and mounting credit card frauds. The researcher touches upon the case of non-performing
assets in past few years across various schedules commercial banks. The study finally proposes some
recommendation to reduce future occurrence of frauds in Indian banking sector.

Madan lal bhasin (2015) 8 analysed that with the growing banking industry in India, Frauds in banks are
also increasing. As per the study about the frauds the questionnaire bases survey was conducted in 2012-
13 among 345 bank employees to known their perception about the bank fraud and evaluate the factors
that influence the degree of their compliance level. The study reveals that there is poor employment
practice lack of effective training and internal control system.

B.Rajdeepa & D. Nandhitha (2015)9 explained that in the recent years banking frauds has increasing
extremely. Every year frauds are increasing extremely. Every year fraud in banking is rising. Frauds present
significant cost to our economy. For customer segmentation & productivity, most of the banks are using data
mining & also for credit scores & approval predicting fraudulent transactions etc. This paper provided an
overview of the concept of data mining and different frauds. It based banking product service and solution is
available in market ATM facility, credit debit and smart cards, internet banking and mobile banking.

Kiragu et al (2015)10 talked about the word related misrepresentation at business banks arranges in Kenya.
The study demonstrated that the same had been expanded on a more extensive scale. The specialist evaluate
the relationship of the span business manages an account with the cheat submitted by workers in these
business banks in Kenya. The study picked all the 43 business banks working in Kenya. An example of
respondent was gathered by utilizing stratified examination was finished by utilizing diverse factual
apparatuses like relapse, ANOVA and so on. It was found in the study that a negative and critical
relationship exists between the extent of the bank and in occupation fraud submitted by representatives, the
study inferred that the in occupation misrepresentation conferred by bank representatives were more littler
banks than in medium and substantial business banks in Kenya.

Vs kaveri (2014)11 explained that while the banking system in India witness steady growth in total business
and profits the amount involved in bank frauds is on the rise. This matters of concern for bank management
and RBI. The unhealthy development in banking system produces not loss to bank but also affects their
credibility adversely for such study it necessary to collect the relevant data relating to bank frauds. The
present paper is based on Comprehensive analysis of bank frauds in India and examines emerging challenges
before banking system.

Siddique & Rehman (2013)12 displayed a calculated study which discusses different sorts of saving money
fraud, for example, IRS evasion, digital fraud and different cards related fraud. The study assessed the effect
of digital cheats on the present Indian saving money situation and different reason in charge of electronic
wrong doing, for example, complex structure of the framework, careless at human part and information
instability. They advance proposed the preventive measures to control the digital wrongdoings appropriation
of redesigned innovation and arrangement of dependable staff and other electronic gadgets.

Bamrara et al (2013)13 investigated different sorts of digital assaults and the preventive technique for
confronting these issues in India the study depended on the essential information. The study took an
example of 100 examples of 100 digital wrongdoing casualties and 50 bank workers. It looked into the
methodologies, which were embraced by digital fraudsters to focus on specific bank and demonstrated that
the general population and private parts banks are decidedly related in different sorts of digital frauds. By
utilising the measurable apparatuses like chi-square and Karl Pearson’s coefficient of connection the study
delineated the connections between the taken variable. It was found in the study that there was no out in the
open and private areas banks. Further the study found that the gate crasher recognitions and digital assaults
were emphatically associated.

Soni and soni (2013)14exhibited a relative investigation of open segment and private area banks in India
for evaluating different digital frauds. The study depended on the auxiliary information taken by
distributed wellsprings of store bank of India. In concentrated on two sorts of examinations i.e.
examination of same segment banks and correlation of various area banks the information was
investigated for 27 open area banks (counting SBI and its partners Cooperative banks), 14 private segment
banks and 6 remote division banks. The examination uncovered the private and outside part bank have
grater offer in fraud worried with e-managing an account, charge and MasterCard and other web keeping
money exchanges and explanation behind happening of cheat was presentation of innovation in saving
money area.
 Chiezey & Onu (2013) 15 audited the nearness of fake practices in Nigerian banks. The study depended
on the auxiliary information gathered from the 14 commercial banks of Nigeria and Nigerian Deposit
Insurance Corporation. It assessed the impact of frauds and false practices happened inside a time of 10
year in Nigerian managing an account area. The examination assessed diverse sorts of cheat and reason in
charge of that in Nigerian saving money industry inside the tie of study.

Johnson Olabode Adeoti (2011) 16 explain that this paper investigates the dimension of ATM frauds in
Nigeria & proffer solution that will mitigate the ATM frauds in the Nigerian banking system. The paper
employs both primary and secondary data to investigate the ATM frauds in Nigerian banks. The chi-square
statistical technique is used for analysing data. Both bank customer and bankers have a joint role to play in
stopping frauds jamming & stolen ATM cards constitute 65.2% of ATM frauds in Nigeria.

S. Adediran & Ekundayo Olugbenga (2010)17 examined that impact of frauds on banks performance in
Nigeria. The data for the study were secondary data generated for annual reports &account of Nigeria
deposit. The data were analysed by using ordinary least square regression technique to see if there are any
relation between bank frauds and bank performance this analysis show that total cases of frauds reported,
amount involved in frauds and expected losses.

Ashu Khanna & Bindu Arora (2009) 18 analysed that the various causes that are responsible for bank
frauds. This paper aims to examine the extent to which bank employees follow various preventive measure
prescribed by RBI. The study of researcher signifies the importance of training in prevention of frauds. The
researcher reveal that implementation of various internal control mechanism are not up to the mark. This
result indicates the lack of training overburden staff, competition, Low compliance level are main reason for
bank frauds.

Chartered Institute of Management Accountants [CIMA] (2009) 19 explained that fraud cannot be studied,
examined or attributed to one factor only. On the contrary, a multifaceted and multifactor approach to the
study of fraud must be undertaken. Looking at a fraudsters perspectives, it is necessary to take account of
motivation of potential offenders, condition under which people can rationalize their prospective crimes
away, opportunities to commit crimes, perceived suitability of targets for fraud, technical ability of the
fraudster, the possibility and likelihood of fraud discovery and carrying out, expectations and consequences
(job loss, family situations and proceeds of crime confiscation and actual consequences of discovery). Each
bank has its own particular frameworks and strategies which ought to be made by taking after the
conventions issued by national bank of a nation, yet when these frameworks have a few holes then it allows
to fraudsters to take profit of the circumstance.

Kumara swamy (2005)20 explained that as an offshoot of moral bankruptcy & consequent devaluation of
man, money rules every aspect of today’s business life. In pursuit of money, man descends to the level of
beast by engaging in frauds & allied manipulative business dealing like money laundering, account
manipulative and other heinous crimes. The application of kumara swamy confidensive motive coupled with
the need for the newly formulated unique approach to ethic based financial statement analysis become highly
relevant and of paramount importance to aid judicious decision making.

Young, (2002)21 says that, plentiful confirmation exists that individual respectability of those running the
banks today has never been at a more elevated amount. At no other time have we seen consideration
regarding the genuine strides; methodology and control of money related exchanges. Representatives' and
also firms in all enterprises participate in deceitful practices everywhere throughout the world. Despite the
fact that the presence of frauds in our banks is not a phenomenal or unforeseen conduct, its commonness is
what is stressing a direct result of all the different issues going up against the most untraceable. Workers
assume an extremely noteworthy part in the event of misrepresentation whether it is by representatives or
with the contribution of outsider.

Bologna (1994)22 examined the different outer elements required for event of fraud. They were absence of
gratefulness to workers, uncalled for inside control, non -illumination of obligation and duties and additional
reporting zone, the execution of the representative underneath desire level, absence of surveys in time,
review and absence legitimate follow up for consistence for approaches, objective achievement and
government direction. The study concentrated on the significant reason mindful particularly to the theft
exercise happening at branch level keeping money. Further the study recommended the different
counteractive action methods that can utilized for the aversion of these sorts of frauds.

Cressey (1973)23 emphatically underlined one of the component of misrepresentation event in bank I trust in
workers. The examination was led in light of essential information was led in light of the essential
information gathered on the premise of logical enlistment. As indicated by the creator a representative who
is confronting any budgetary issue at his own end can be a potential purpose behind increment in cheats. On
the off chance that there is some data, which is of classified nature and by spillage of that data a worker can
get some monetary advantage then he can abuse the trust. So it was inferred that ravenousness of
representative can be significant explanation behind happening of cheats

NP singh (1970)24 explained that the one of the fast growing technology is phishing. Phishing is an
application Of Trojan horse program. Trojan horse program insulates itself into a user’s computer via email
& direct the user of the system to website which exactly similar to financial institution website. Crooks pick
up password and account number as soon as customer log into these sites. Phishing causes maximum loss to
the customer & bank. Researcher analysed the reasons for increasing in phishing activities.

Ahmad kabir Usman & Mahmood shah (1970) 25 explained that e-banking fraud is an issue being
experience globally and is continuing prove costly to both bank and customers. The purpose of the paper is
to understand factors that could be critical in strengthening fraud prevention systems in electronic banking.
This paper reviews relevant literatures to help identify potential critical success factors of frauds prevention
in e-banking. Beyond technology there are other factors that need to be considered such as internal control
customer education and staff education. These findings will help assist bank and regulators with information
on specific areas that should be addressed to build on their existing fraud prevention system.

CHAPTER IV
DATA ANALYSIS AND INTERPRETATION

4.1 MEANING
Data analysis is defined as a process of cleaning, transformation and modelling data to discover useful
information for business decision making. The purpose of data analysis is exact useful information from data
and taking the decision based upon the data analysis.

4.2 TOOLS OF DATA ANALYSIS

Data analysis tools make it easier for user to process and manipulate data, analyse the relationships and
correlation between data sets and it also helps to identify patterns and trends for interpretation, here is a
complete list of tools.

I. EDITING:
The editing of data is a process of examining the raw data to detect errors and omission and to correct the, if
possible, so as to ensure legibility, completeness consistency and accuracy.

II. CODING:
Coding is the process of assigning some symbols (either) alphabetical or numerals or (both0 to the answers
so that the responses can be recorded into a limited number of classes or categories. The classes should be
appropriate to the research problem being studied.

III. CLASSIFICATION:
In most research studies, voluminous raw data collected through a survey need to be reduced into
homogenous groups for any meaningful analysis. This necessitates classification of data, which in simple
terms is the process of arranging data in groups or classes on the basis of some characteristics.
IV. TABULATION :
The tabulation is used for summarization and condensation of data. it aids in analysis of relationships, trends
and other summarization of the given data. The tabulation may be simple or complex. Simple tabulation
results in one way tables, which can be used to answer the questions related to one characteristic of the data.
The complex tabulation usually results in two way tables, which give information about two interrelated
characteristics of the data

V. GRAPHS:

Graphic representation is another way of analysing numerical data. A graph is a sort of chart through
which statistical data are represented in the form of lines or curves drawn across the coordinated points
plotted on its surface. Graphs enable us in studying the cause and effect relationship between two variables.

VI. DIAGRAM:

A diagram is a symbolic representation of information using visualization techniques. Diagrams have been
used since ancient times, but became more prevalent during the Enlightenment. Sometimes, the technique
uses a three-dimensional visualization which is then projected onto a two-dimensional surface. The word
graph is sometimes used as a synonym for diagram.

4.3 TEST OF DATA ANALYSIS

A test can be considered an observation or experiment that determines one or more characteristics of a given
sample, product, process, or service. The purpose of testing involves a prior determination expected
observation and a comparison of that expectation to what one actually observes.

a) T-TEST:

Test for a student’s distribution-i.e. in a normal distributed population where standard deviation in unknown
and sample size is comparatively small. Paired t-test compares two samples.

b) Z-TEST

A z-test is a statistical test to determine whether two population means are different when the variances are
known and the sample size is large. It can be used to test hypotheses in which the z-test follows a normal
distribution

c) CHI-SQUARE TEST:
Test for an association of significance between two categorical in a population sample. Typically used with
random sampling.

d) ANALYSIS OF VARIANCE (ANNOVA)

Test for and analysis differences between the means in several groups. Often used similarly to a t-test, but
for more groups.

e) TREND ANALYSIS

Trend analysis is the widespread practice of collecting information and attempting to spot a pattern. In some
fields of study, the term "trend analysis" has more formally defined. In project management, trend analysis is
a mathematical technique that uses historical results to predict future outcome. This is achieved by tracking
variances in cost and schedule performance. In this context, it is a project management quality control tool.

4.4 QUANTITATIVE RESEARCH METHOD

Mean, mode and median are popular quantitative research methods used in business, as well as, engineering
and computer sciences. In business studies these methods can be used in data comparisons such as
comparing performances of two different businesses within the same period of time or comparing
performance of the same business during different time periods

a. Mean:

Mean implies average and it is the sum of a set of data divided by the number of data. Mean can prove to
be an effective tool when comparing different sets of data; however this method might be disadvantaged
by the impact of extreme values.

b. Mode:

Mode is the value that appears the most. A given set of data can contain more than one mode, or it can
contain no mode at all. Extreme values have no impact on mode in data comparisons, however, the
effectiveness of mode in data comparisons are compromised in the presence of more than one mode.

c. Median:

Median is the middle value when the data is arranged in numerical order. It is another effective tool to
compare different sets of data, however, the negative impact of extreme values is lesser on median
compared to mean.
4.5 CASE STUDY
4.5.1 INTRODUCTION
India has 108 publicly-listed family-owned businesses, the third highest in the world, while China tops the
tally with 167 such companies followed by the US which has 121 60 per cent of family businesses in India
are in their third generation compared to 30 per cent of Chinese companies. The financial performance of
family-owned companies is also superior to those of non-family-owned peers. According to Credit Sunrise,
Indian family-owned businesses appear to be more optimistic with regard to future revenue growth and have
a slightly more conservative approach to funding that growth. Because of the prominent challenges such as
succession planning, greater competition and talent retention faced by the Indian family-owned businesses,
they are not able to attract many investors. Credit Sunrise report also reveals that investors are not too
concerned about the level of ownership but rather how involved the family owners are in the daily running
of the business. In a macro picture, financing options for family business are generally less in India for the
very fact that the majority of family businesses view maintaining control over their company as a key
success factor. But to increase profit and accelerate growth, a family business too requires strong financing.
Therefore, knowing the fact of limited financing options and with a target to achieve over ambitious project
in a shorter period, owners of these family businesses attracted to fraudulent practices. Nirav Modi, a
diamond giant, is one such example. Nirav Modi, with a net worth of $1.73 billion, acquired fraudulent
letters of undertaking from one of Panjab National Bank (PNB) branches for overseas credit from other
Indian lenders to meet his dream of having200 exclusive diamond stores bearing his name across the world
by 2025. He flew away after wilful defrauding PNB of more than Rs 12600 crore shaking the Banking
System of India.

Who is Nirav Modi?

A 47 year old diamond jewellery and designer, Nirav Modi, is a third generation diamantine. His grandfather
left Mumbai for Singapore in the 1940s, initiating his son into the diamond trade. Deepak Modi, Nirav’s
father, moved to Antwerp in Belgium, the centre of the diamond world, in the 1960s. Though Nirav was
born in Mumbai, he grew up in Antwerp, joined his uncle Mehul Choksi, owner of Gitanjali Gems, at the
age of 19 and spent 9 year to master in-side out of jewellery business. In the year 2004, Modi launched his
own company named Firestar International, with his wife and brother, sourcing and trading in the highest
quality of diamonds. In year 2010, he set up ‘Nirav Modi’ store and made an instant splash. By 2018, Modi
has opened 14 such ‘Nirav Modi’ boutiques in Delhi, Mumbai, Hong Kong, New York, London, Beijing,
Singapore, Las Vegas, Hawaii and Macau. With this instant rise, Modi dreamed of having 200 exclusive
diamond stores bearing his name across the world by 2025. This of course needed huge capital investment in
very short time. The over-ambitious project has inspired the family-owned business to find out an easy way
out i.e. LOU. And to surprise to all, that has worked for quite a long time.

How He Did It?

1. Firms promoted by Nirav Modi, his wife Ami Nirav Modi, brother Nishal Modi and uncle
Mehl Choksi of Gitanjali Germs -Diamond R US, Solar Exports and Stellar Diamonds -
approach PNB officials, asking for issuance of letter of undertaking (LOU) that would allow
them to raise capital from overseas branches of other Indian public sector banks for imports.
PNB branch issues LOUs without mandatory collaterals.
2. PNB sends messages on Society for Worldwide Interbank Financial Telecommunication
(SWIFT) system to overseas branches of 30 Indian banks, asking for loans as required by its
client. Three persons, with separate password-protected access, meant to handle SWIFT
messages. But one of the accused officials named Gokulnath Shetty has access to all three
passwords. Messages seem to have been sent by only two people.
3. The banks, on receiving intimation via SWIFT, transfer the money to PNB’s ‘nostro’
account, where other Hong Kong- based branches of these banks send in the money, are
required by PNB. It is unclear if the recipient bank sent confirmatory notes to the PNB
branch and regional office. No alarm raised.
4. PNB pays this money to Modi and his firms, but they use it only to repay a previous loan. On
Modi firms’ request, a fresh LOU is generated, extending the earlier one, this time also
covering the interest to be paid. SWIF transactions has not reconciled with PNB’ core
banking system. None of these high- volume ‘nostro’ transactions amounting over Rs.
11,000 crore were red-flagged at PNB
5. The ‘ever-greening of loans plays out over many years, ultimately ballooning to a huge sum,
as in the present case. A CBI FIR filed on February 15, 2018, says Rs.4886.72 crore was
swindled by Modi and his firms in 2017-18 alone by getting 143 LOUs issued through PNB.
Actually, the auditors in bank branches are supposed to verify these transactions. The branch
manager is responsible to review the SWIFT transaction register. LOUs issued by banks are
supposed to send to RBI every quarter. But all these procedures were ignored.
6. He scam comes to light only after a change of guard at the particular window at PNB that
deals with such overseas loans. When Modi’s firms approach PNB for fresh LOUs, they are
asked to submit adequate collaterals. Modi’s firms question the move, saying such letters
have been issued in the past without any fuss.
7. This sets off alarm bells in PNB, and internal investigations reveal the bank has been cheated
o Rs.280 crore. Subsequently, the CBI files an FIR on January 31, 2018, against Modi and
 his family members, and other PNB officials on charges of criminal conspiracy, cheating and
abuse of official position by public servants.
8. In a notice to the Bombay Stock Exchange (BSE) on February 15, 2018, PNB says the scam
is to the tune of Rs.11400 crore which is now aggregated to Rs.12600 crore. The PNB share
price crashes (28 per cent as on February 19, 2018), as do shares of other listed PSU banks.
9. Meanwhile, on February 16, 2018, pass-port of both Modi and Choksi are suspended but by
that time they already flew away. CBI then approached Interpol to track down Modi family.
10. On February 17, 2018, CBI arrests Shetty and Karat, along with Hemant Bhatt, the
authorized signatory of companies run by Modi and relatives. The three are sent to CBI
custody till March 14, 2018.The Enforcement Directorate (ED) is looking in to this case.
11. On March 12, 2018, RBI halts issue of LOU for import trade credit.

Why this Happened?

 Over-ambitious project of the family-owned business and fraudulent practices to get easy and fast
finance.
 Huge lapses in banking operations, poor management scrutiny, lack of accountability and
transparency in public sector banking in India.
 Unholy nexus of dishonest and influential businessmen who artfully bend rules to suit their
requirements, flaunting their ties with those in power
 Auditors’ criminal negligence.
 The governing and controlling authority, RBI, was missing in action, even their auditors!
 Irresponsible behaviour of Government being a majority owner in PSBs

LESSON LEARNT FROM NIRAV MODI BANK FRAUD

Last year, in February, India’s second largest government-owned lender, Punjab National Bank
(PNB) disclosed that it has been badly hit by Rs 14,000 crore financial fraud orchestrated by
diamond merchant Nirav Modi and his uncle Mehul Choksi.
A year after this shocker, the key perpetrators of the case—Modi and Choksi—are still on the run.
Just like in the Vijay Mallya-Kingfisher case--the government and investigators are engaged in a
cross-border legal battle that has not yet made any meaningful progress.
As far as PNB is concerned, the bank is mostly past the initial pain of the mega fraud, having made
the provisions to cover the losses, and is revisiting the processes and safety infrastructure. But the
damage on the bank’s reputation won’t be healed quite easily.
The PNB fraud episode has offered a few important lessons to the banking sector and has also left
some key unanswered questions.
 1. The software wasn't to blame, but the human beings in charge of it

The PNB fraud is often blamed on technology—the lack of integration between the SWIFT software and
core banking. Post-the fraud, the Reserve Bank of India (RBI) made the rules stricter and asked banks to
address this problem. But top bankers have opined that failure to ensure adherence to laid-out processes and
rules have played a bigger role in the fraud remaining undetected for years. The PNB failed to monitor
transactions involving Letter of Undertaking--LOUs (the instrument used by Modi to design the scam) from
the very beginning. The fraud began in 2011. The bank kept honouring the instrument all these years till the
scam came out in public in February 2018.

2. The bank’s auditors, too, either failed or became party to the crime

In the PNB episode, the SWIFT messaging platform that was used by the corrupt bank officials and Modi is
subjected to a daily check by the branch manager, which is compulsory in any bank. Even if one imagines
that this part failed, the branch manager has to do a daily tally of income and expenditure in the branch while
one of the officers (not involved in the transactions) combs through the books to look for suspicious
transactions, the official said. That apart, the bank conducts a concurrent audit through the year. Such a fraud
should have reflected there. The PNB miserably failed to follow the rule book that could have prevented the
fraud.

3. The case was initially looked at in isolation—this was a major mistake

After failing in its duty, paving way for one of the biggest-ever bank frauds since nationalisation, the PNB
kept defending itself by passing the blame to the SWIFT software, its disconnect with the CBS system and
Nirav Modi’s criminality, to claim innocence.

From day one, the PNB should have been the trigger to overhaul the manner in which risk management
systems function within the banking system. The problem here was that the system failed to function with
respect to basic checks and balances. In one of the interviews, former RBI deputy governor and PNB
chairman K C Chakrabarty had told Firstpost that Indian banks have zero-risk management capacities. The
RBI shouldn’t treat this as a one-off case and should start working on overhauling the risk management
framework for Indian banks

4. RBI initially acted in panic by banning LOUs outright

The RBI committed another blunder by terminating LOUs altogether in a knee-jerk reaction post-the PNB
fraud. To begin with, the RBI couldn’t detect a banking fraud right under its nose, perpetrated by a smart
jeweller in collusion with certain low-rank bank officials; that too for a good six to seven years. When the
fraud surfaced and questions were raised about the regulator’s efficacy to do its job properly, it decided to
kill a legitimate trade instrument outright, something traders have been using for long. Both importers and
exporters use LOUs extensively as this is one of the cheapest instruments available to them. The RBI banned
it without giving much thought to the larger impact on the country’s importers and exporters. This was a big
mistake from the RBI.

5. Dual regulation is an issue in banking system

Dual regulation is a major problem for Indian banks. The PNB fraud pushed some skeletons out of the
closet when both the central bank and the government locked horns over the regulation of government-
owned banks. Former RBI Governor Urjit Patel had argued that the apex bank doesn’t have strong
regulatory control over PSBs, as it does with private banks. He cited seven areas or instances where the RBI
cannot initiate actions on state-run banks, which control 70 percent of the assets of the banking industry
including provisions such as inability of the RBI to remove directors and management at PSBs even if it
wants to, to force a merger like it does in private banks, to revoke a banking licence or to trigger liquidation
of PSBs among others.

The government countered the RBI citing clauses within the Banking Regulation Act that gives powers to
the RBI over banks. In hindsight, it is apparent that there is an issue of dual regulation of PSBs that is
triggering larger problems. The banking crisis gives an opportunity to policymakers to rethink the issue of
dual regulation, which doesn’t augur well for the industry, 70 percent of which is dominated by PSBs.

6. All officials responsible for failure in risk-management should be accountable

In this context, the Central Bureau of Investigation (CBI) charge sheet on the Rs 13,000 crore Nirav Modi-
scam at PNB, which picks the name one of the former CEOs of the bank who served during the scam-period,
looks strange. It could be true that the continuance of the fraud was facilitated by Usha
Ananthasubramanian, but what about the original perpetrators of the crime? Ananthasubramanian was
PNB’s CEO between August 2015 and May 2017 while the scam began in 2011 as admitted by the bank
management at the first press conference where it announced the scam. Between 2011 and 2015 there were
two other CEOs for PNB—K R Kamath and Gauri Shankar. Were they asked about the Letter of
Understanding (LOU) transactions by the RBI or CBI? If the charge is of ignoring banking rules, i.e.,
prudential norms governing the LOU transactions, shouldn’t it apply to all?

To sum up, the PNB fraud wasn’t a financial crime orchestrated by two greedy businessmen alone. This
incident epitomized the sheer absence of basic risk management systems in India’s banking system
dangerously dominated by government-owned banks and the deplorable governance standards followed by
even the top financial institutions in our country.
 DATA INTERPRETATION

Figure 4.1

Source: Reserve bank of India

INTERPRETATION:
In this fig4.1 loan fraud in Indian state banks this graph is from over 5 years to March 2017. Punjab
national bank is on the top list with 389 cases totalling 65.62 billion rupees ($1.03 billion) over the
last five financial years, in terms of the total amounts involved. After the Punjab national bank, Bank
of Baroda had the highest amount of loan fraud reported, with 44.73 billion rupees from 389 cases.
Bank of India ranked third, with loan frauds totalling 40.5 billion rupees from 231 cases over the
same period, the data shows. PSB has lowest loan fraud.
Figure 4.2

losses posted by India's state-owned bank in january-

march 2018 rupees
Punjab national bank

State bank of India

Canara bank

Allahabad bank

Union bank losses posted by India's state-

owned bank in january-march
2018 rupees
Syndicate bank

UCO bank

central bank of India

Oriental bank of commerce

Dena bank

punjab & sind bank

Bank of maharashtra
.
.
.
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2011 12.84 22.13 20.31 15.58

2012 14.36 18.52 18.4 13.57

2013 15.94 15.19 14.43 11.49

2014 10.49 9.69 13.21 9.12

2015 11.17 8.12 9.3 5.43

MEAN 12.96 14.73 15.13 11.038

(Source: SBI, PNB, BOB and BOI Annual Report)

Fig. 4.1.2: ROE

The Table 4.1.2 & Diagram shows the Four Selected Public

Sector bank (SBI, PNB, BOB and BOI) Return on Equity for

the periods of 2011 to 2015. It is indicated how much an

equity shareholders’ investment actually earning. In this Table

4.1.2 and graph shows that the highest ROE was in 2013

(15.94) of SBI and lowest was in 2014 (10.49). The ROE was

highest was in 2011 (22.13) of PNB and lowest was in 2015

(8.12). The ROE highest was in 2011 (20.31) of BOB and

lowest was in 2015 (9.30). The ROE highest was in 2011

(15.58) of BOI and lowest was in 2015 (5.43). The ROE is

higher BOB (15.13) as compared to SBI (12.96), PNB (14.73),

BOI (11.038) and BOB and PNB both investment earning is

.