The Reserve Bank of India has asked banks for details of letters of undertaking that they have issued in the past “several years”, Reuters reported on Sunday. The crackdown comes about a month after India’s biggest bank fraud was discovered, where letters of undertaking were issued fraudulently by employees at Punjab National Bank.
Trade financing activities by lenders are the focus of this special audit of state-owned banks, PTI reported, quoting unidentified bankers. In a letter to all banks last week, the central bank asked for details of outstanding amounts in credit guarantees given through LoUs. It also asked whether the banks had pre-approved credit limits or kept enough cash on margin before issuing the guarantees.
The RBI asked for details of LoUs issued as far back as 2011, a banker told Reuters, while another said that banks were asked to respond earlier this week.
“If there is a problem in one bank, they will be checking the whole system,” a senior banker was quoted as saying. “What’s the outstanding? Is it correctly reflecting in the book or not? That kind of thing.”
The Punjab National Bank has said it was defrauded of Rs 12,703 crore. The main accused, billionaire jeweller Nirav Modi and his partner Mehul Choksi, had left the country in early January, just weeks before the scam was made public. So far, they have both refused to return to India.
Assocham warns against ‘over-reaction’
Industry body Assocham – Associated Chambers of Commerce and Industry of India – warned on Sunday against “over-reaction” by banks and investigators after the fraud at Punjab National Bank. It said this would hurt “essential” loans to traders and the industry and hurt growth.
The “level of the noise” is justified, but “it could cause a huge loss of confidence”, said Assocham Secretary General DS Rawat. “So, it is time to show immense restraint and use the adverse situation as an opportunity to fix the systemic issues.”
The organisation said India could learn from the handling of the 2008 financial crisis by the United States. “The US authorities worked at the root of their banking system and have put in place some robust risk mitigation and prudent system,” Assocham’s statement said.
Assocham supported the idea of divesting government stake in banks to below 50%, and said “immediate steps” were needed to help state-owned banks prevent, detect and act on fraud.