What are banks doing stop PNB recurrence?

MoneySeveral banks have directed their overseas branches to check the exposure limit before disbursing payments against any LoU after the PNB scam hit the headlines.

MUMBAI/KOLKATA – Availing short-term overseas credit could become more difficult for less established firms, with India’s biggest banking fraud at the Punjab National Bank (PNBBSE -7.36 %) triggering a spell of self-introspection – and process strengthening – among local lenders.

From the strongest lenders such as State Bank of IndiaBSE -1.51 %, ICICI Bank, Bank of Baroda, and Axis BankBSE 0.32 %, to the less robust and geographically more constrained lenders such as Central Bank of India and United Bank of India, banking managements have begun examining their systems and processes with urgency and are beginning to plug the gaps.

Also, banks are raising the cost of overseas trade financing instruments. It is sometimes 5-10 basis points over LIBOR depending on different tenures. Select banks are charging much higher rate about 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 executive said.

Banks are now centralising the lines of credit discounting system or mandating the use of core banking solution to improve management oversight, multiple bankers told ET.

The $1.8-billion fraud has exposed supervision lapses at PNB and failure of internal controls. Reserve Bank of India (RBI) said it has undertaken a supervisory assessment of control systems in the bank and would take appropriate supervisory action.

Bank of Baroda has decided to centralise the Lines of Credit (L/C) or Letters of Undertaking (LoU) discounting system. SBI, the country’s biggest bank, is doing just that.

“The effort (to review and upgrading the system) is a continuous one and we keep plugging any gaps in the processes,’’ Rajnish Kumar, chairman of SBI, said at an event in Kochi.

Several banks have directed their overseas branches to check the exposure limit before disbursing payments against any LoU after the PNB scam hit the headlines.

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 Rs 61,260 crore over the past five years, Reuters reported Friday.

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

While some banks are using specialised software instead of SWIFT messages, others are routing them through the core banking system or CBS.

“We are one of the few banks with SWIFT integrated into the CBS,” YES Bank said. Mails sent to Allahabad Bank, Axis Bank, ICICI Bank, HDFC BankBSE -0.27 %, Uco Bank and United Bank of India remained unanswered.

“When such scams hit investor confidence, we need to go all out to prevent its recurrence. We are doing meticulous checks of our trade finance transactions,” said a senior management official at a private sector bank.

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[“Source-economictimes.indiatimes”]