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How Can Banks Stop PNB Recurrence?

After the Punjab National Bank fraud, availing short-term overseas credit could become more difficult. This fraud has triggered a spell of self-inspection process among local lenders.

Banking giants such as State Bank of India, ICICI Bank, Bank of Baroda and Axis Bank to the less powerful and more constrained lenders such as a Central bank of India and United Bank of India, banking managements have started examining their systems and processes with urgency.

Banks are raising the cost of overseas trade financing instruments. Some banks are charging much higher rate of 30-40 bps over LIBOR. “It’s also important to have quality buyers’ credit than quantity…to bring down the bad loan ratio,” a Bank of Baroda said

Furthermore, banks are now centralizing the lines of credit discounting system or mandating the use of core banking solution to improve management oversight. PNB’s $1.8 billion fraud has exposed supervision lapses. Reserve Bank of India said it has undertaken a supervisory assessment of control system in the bank. They would take appropriate supervisory action.

Bank of Baroda has decided to centralize the Lines of Credit (L/C) or Letters of Undertaking (LoU) discounting system. SBI is also doing that.

Banks have started sticking to checklists, such as the underlying trade transactions, nature of goods covered, country of origin and regulatory compliances. Indian banks have reported 8,670 loan-fraud cases involving INR 61,260 crore over the past five years.

Lenders are no more relying on SWIFT messages only. Whenever an overseas branch of domestic bank receives a LoU, it will contact the Indian bank directly if such LoU has been issued with proper authorization.

PNB fraud has indeed shaken the roots of Indian Banking system. Since the matter is under investigation, banks will be more cautious to ensure they don’t get such bad name.

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