SBI chief Rajnish Kumar said the PNB fiasco is something similar to the fall of Barings Bank, where one trader and his misadventure brings down the whole bank. Photo: Hemant Mishra/Mint
SBI chief Rajnish Kumar said the PNB fiasco is something similar to the fall of Barings Bank, where one trader and his misadventure brings down the whole bank. Photo: Hemant Mishra/Mint

SBI chief calls for industry-wide review of risk controls after $2 billion PNB fraud

Comparing the PNB fraud with 1995 Barings debacle, SBI chairman Rajnish Kumar called for an industry-wide review of risk controls in day-to-day operations

New York/Mumbai: The chief of State Bank of India, biggest Indian lender, called for an industry-wide review of risk controls in day-to-day operations, comparing a $2 billion fraud at Punjab National Bank (PNB) to the 1995 Barings Plc rogue trading debacle that ended the 233-year-old British merchant bank’s independence.

“The Punjab National Bank fiasco is something similar to the fall of Barings Bank, where one trader and his misadventure brings down the whole bank," Rajnish Kumar, chairman of State Bank of India, said in an interview at his Mumbai office on Tuesday. “In this case also the system has completely failed at a particular office, in a particular organization, causing huge losses."

PNB has lost about a third of its market value and is facing rating downgrades since disclosing the scam two weeks ago, when it alleged that a rogue employee provided fake guarantees worth $2 billion to a couple of jewellers, which they used to obtain loans from abroad. While the extent of losses to PNB is yet unclear, the news has triggered a wave of fingerpointing and regulatory tightening across the industry that could chill a nascent recovery in lending.

Shares of PNB sank the most since 2004 on Tuesday and hover near a 20-month low, pacing losses among state-run lenders, after regulators asked all government-owned banks to review bad loans above Rs50 crore ($7.7 million) for fraud. The banks have 15 days to identify and clean up weaknesses in the way they do business, the top bureaucrat overseeing the sector said on Twitter.

“In a way it seems to me as a one-off incident," Kumar said of the PNB fraud, adding that while there has been “some impact" on the rupee the perception of India hasn’t changed much. “But at the same time it also is a pointer that there is need for relooking at the risk governance architecture."

Kumar predicts that Asia’s third-largest economy will continue to grow strongly, demand for credit will increase and Indian bond yields will “stabilize" after rising to a two-year high as the global recovery gains strength. Indian gross domestic product (GDP) probably expanded 7% in October to December, faster than 6.3% the previous quarter, according to the consensus estimate in a Bloomberg survey before data due 5:30pm in New Delhi on Wednesday.

‘Idiosyncratic’

Loan growth accelerated to about 11% this month before the PNB fraud came to light, almost double the average pace last year as the government pledged to inject a record $32 billion into state-run banks. It had plunged to a 25-year low late in 2016 as lenders grapple with the second-highest bad-loan ratio among big economies.

Fitch Ratings and Moody’s Investors Service have placed PNB’s ratings on review for possible downgrade. While Moody’s says the PNB fraud is “ idiosyncratic" and there’s nothing to prove that such illegal practices are widespread across India’s banking sector, analyst Alka Anbarasu said in an email that PNB will need high provisioning to tide over the problem.

State Bank of India also posted its first loss in at least 17 years last quarter as provisions surged. The lender said an audit by the central bank showed soured debt was about Rs23,200 crore higher than what SBI had reported as of end-March 2017.

“Credit risk is a known devil which at worst you might underestimate," Kumar said. “But if you don’t take care of your operational risks, it can hit you very hard on the face when least expected." Bloomberg

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