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Foreign banks’ reaction to the $2 billion PNB fraud, which allegedly involved fake LoUs, is having an impact on financial markets. The rupee has weakened 2% this month, the biggest drop in Asia after Indonesia’s rupiah. Photo: Abhijit Bhatlekar/Mint
Foreign banks’ reaction to the $2 billion PNB fraud, which allegedly involved fake LoUs, is having an impact on financial markets. The rupee has weakened 2% this month, the biggest drop in Asia after Indonesia’s rupiah. Photo: Abhijit Bhatlekar/Mint

PNB fraud fallout spreads to market for trade finance

The PNB fraud has made foreign banks, such as Citigroup, Deutsche Bank, Standard Chartered and HSBC more reluctant to accept bank guarantees from Indian banks

Mumbai: The fallout from India’s biggest banking fraud at Punjab National Bank (PNB) is spreading to the market for trade financing, as foreign lenders become more reluctant to accept the guarantees from their local counterparts that underpin the loans.

Citigroup Inc., Deutsche Bank AG, Standard Chartered Plc and HSBC Holdings Plc are among banks reducing exposure to these transactions, used by smaller companies to access short-term dollar funding, said people with knowledge of the matter. As questions are raised about the creditworthiness of guarantees from Indian public sector banks, rates have risen by as much as 0.5 percentage point for some types of financing, the people said, asking not to be identified as the details are private.

Foreign banks’ reaction to the $2 billion PNB fraud, which allegedly involved fake letters of undertaking (LoUs), is having an impact on financial markets. Signs that trade credit is getting tougher for smaller firms have hurt the rupee, which is among Asia’s worst performers this month and is poised for its first monthly loss since September.

Big Indian companies, which have direct access to funding from foreign lenders and don’t rely on interim guarantees, aren’t affected by the slowdown, the people said.

Spokesmen in Mumbai for Deutsche Bank, HSBC and Citigroup declined to comment. “We continue to support our clients on transactions that meet our internal controls and standards," a spokesman for Standard Chartered said by email.

India runs a trade deficit, which means it needs a constant supply of dollars. These come through foreign funds’ purchases of Indian stocks and bonds, local exporters’ sale of foreign-currency earnings and dollar loans from foreign banks. India is one of the world’s biggest users of trade funding worldwide, according to the ICC Global Survey 2017.

The rupee has weakened 2% this month, the biggest drop in Asia after Indonesia’s rupiah. Concerned about the currency, the Reserve Bank of India (RBI) is in touch with foreign lenders and is urging them to resume trade loans, the people said. Credit to exporters and importers is expected to return to normal soon, one person said. An email to RBI was unanswered.

Companies use trade funding as a stop-gap measure until they receive delivery of goods or payment from their buyers or sellers. The interlinked nature of this business—crisscrossing time zones and geographies—means trust is an inseparable component of such transactions.

As perception about the safety of guarantees issued by India’s banks worsens, some Indians firms may now have to pay at least 1 percentage points above the London interbank offered rate on some trade loans, compared with about 0.5 percentage points before the PNB fraud was disclosed, the people said. Bloomberg

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