Impact of PNB Scam On Banking Sector and Investors in India: An Empirical Study

Impact of PNB Scam on Banking Sector
and Investors in India: An Empirical Study
Published In
International Journal of Research in Economics and Social Sciences
(IJRESS)
Vol. 8 Issue 3, April – 2018 ISSN(o): 2249-7382 | Impact Factor: 6.939 |
Dr. Harshal Anil Salunkhe

MBA & Ph.D
Contains
Abstract
Introduction
Objective
Research Methodology
Impact on Banking & Investors
Conclusion
Suggestions
References
Abstract
 On 14th February, 2018 Banking Industry of India registered a
big scam in the form of Letter of Understanding (LoU) scam of
PNB. The PNB is second largest public sector bank in India
with good market capitalization.
 The size of this scam is near about Rs.11400 crore, Mr. Nirav
Modi’s firms sought the LoU to get buyers’ credit from foreign
banks whereby they can finance diamond imports to India.
 In this paper, the researcher have discussed the case study of

Punjab National Bank (PNB) and its impact on banking sector
and investors in India.
Introduction
 The Punjab National Bank (PNB) is one of the leading
nationalized banks in India.
 The operations of PNB are not limited to India as it is
Multinational bank.
 During the history of 122 years, the 7 different banks have
merged with PNB. PNB have total 6941 domestic branches and
9753 ATMs all over India.
 The total numbers of customers of PNB is 10 crore as on today.
 The gross and net NPA of PNB was 13.31% and 8.44% as on
September, 2017 respectively.
Objective & Research Methodology
Objective of Study
 To study the impact of PNB scam on banking sector and
investors in India.
Research Methodology
 Data collected from newspapers, several articles and websites.
 Informal discussions with the Experts in Banking Sector,
practicing Chartered Accountants and Investment Consultants,
finance faculty members.
Scam in PNB
 The Punjab National Bank’s Brady House Branch in Mumbai
issued fraudulent Letter of Undertaking (LoU) worth of Rs.
11,400 crores in favor of Diamond Trader Mr. Nirav Modi’s
firms.
 Foreign branches of three Indian banks – Allahabad Bank, Axis
Bank and Union Bank of India, provided credit to Mr. Nirav
Modi’s firms based on the PNB LoUs.
 Primary report of PNB indicates that the LoU was issued
without proper authorization
 The whole scam came into limelight when Mr. Nirav Modi
failed to make repayment on time due to financial trouble.
Continue…
Buyer’s Credit:
 In simple words, Buyer’s Credit is a loan facility extended to
an importer by a bank or financial institution to finance the
purchase of capital goods or services.
Letter of Understanding:
 A LOU or Letter of Understanding is a formal document which
includes the terms and conditions of understanding of a
contract which mostly has been negotiated up to this point only
in spoken form.
Impact on Banking & Investors
Share Price of PNB On BSE (14 Feb, 2018 to 23 Mar, 2018)
160
145.8
140
120
100 93.15
80
60
40
20
0
0 1 8 0 18 0 1 8 0 1 8 0 1 8 0 18 0 1 8 0 1 8 0 18 0 1 8 0 1 8 0 1 8 0 1 8 0 1 8 0 1 8 0 1 8 0 1 8 0 1 8 0 1 8 0 1 8 0 18 0 1 8 0 1 8 0 18 0 1 8 0 1 8 0 18
-2 -2 -2 -2 -2 -2 -2 -2 -2 -2 -2 /2 /2 /2 /2 /2 /2 /2 -2 -2 -2 -2 -2 -2 -2 -2 -2
- 0 2 -02 -02 -02 -0 2 -02 -02 -0 2 -02 -02 -0 2 1/3 5/3 6 /3 7/3 8/3 9 /3 2 /3 -03 -0 3 -03 -03 -0 3 -03 -03 -0 3 -03
14 15 16 19 20 21 22 23 26 27 28 1 13 14 15 16 19 20 21 22 23
Reasons of Scam
 The transfers of bank employees take place after every three
years.
 Corruption comes from the top and it percolates till the bottom.
 Banks do not show actual NPA. Hence, later on scams may
take place.
Conclusion
 The Net worth of the PNB decreased and it will continue to

decrease further. As a result, its Book Value and Market
Value per Share will also decrease.
 PNB scam has started showing its bad effects already.

Market value of PNB per share is decreased by 36.11%
during the period of 14.2.2018 to 23.3.2018.
Suggestions
 Ministry of Finance and RBI should take strict action against the
PNB officials, responsible for the scam immediately.
 PNB should block all the accounts of concerned persons and take
custody of all assets of defaulters of PNB immediately to create
the confidence among the investors.
 Government should take care of the investors. PNB and

Government should change the Board of Directors and Auditors
of the bank.
 Also they may appoint an ‘Official Administrator’ to regulate and

control present important banking transactions.
References
 Buyer's Credit. (n.d.). Retrieved 03 05, 2018, from www.investopedia.com:
https://www.investopedia.com/terms/b/buyers-credit.asp
 Letter of understanding. (n.d.). Retrieved 03 05, 2018, from en.wikipedia.org:
https://en.wikipedia.org/wiki/Letter_of_understanding
 PNB Scam: Effect on Mutual Funds. (n.d.). Retrieved 03 05, 2018, from
https://groww.in:https://groww.in/blog/pnb-scam-effect-on-mutual-funds/
 What Is Punjab National Bank’s Lou Fraud? (n.d.). Retrieved 03 05, 2018, from
www.indianeconomy.net:
https://www.indianeconomy.net/lms/economynews/punjab-national-banks-lou-frau
d.html
/
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Impact of PNB Scam on Banking Sector

and Investors in India: An Empirical Study

Dr. Harshal Anil Salunkhe

 In this paper, the researcher have discussed the case study of

 The Net worth of the PNB decreased and it will continue to

 PNB scam has started showing its bad effects already.

 Government should take care of the investors. PNB and

 Also they may appoint an ‘Official Administrator’ to regulate and

 Buyer's Credit. (n.d.). Retrieved 03 05, 2018, from www.investopedia.com:

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