Punjab National Bank discovers $1.8bn fraud in Mumbai branch

One of India’s largest banks has uncovered fraudulent payments worth $1.8bn to a handful of customers made through a single branch, sending shockwaves through the country’s financial sector.

In a notification to stock exchanges, Punjab National Bank — the country’s second largest state-backed lender — said the “fraudulent and unauthorised transactions” had been made at one of its branches in Mumbai “for the benefit of a select few account holders with their apparent connivance”.

“Based on these transactions, other banks appear to have advanced money to these customers abroad,” it added, without giving further details. 

Shares in PNB plunged 10.4 per cent on Wednesday, valuing the bank at $5.5bn — a hefty discount to its declared book value of $7.6bn.

Hemindra Hazari, an independent bank analyst in India, said the incident looked like a “complete failure of controls”.

The news added to broader turmoil in banking stocks, after the central bank’s Tuesday evening announcement of tougher norms for banks’ handling of their bad loans, forcing them to act more swiftly in recognising losses. Bank of India fell by 8 per cent, and State Bank of India shares were down by 4.6 per cent.

On February 5, PNB had announced a suspected fraud worth Rs2.8bn ($44m), also without giving details. It did not specify on Wednesday whether the two suspected frauds were connected.

PNB said its liability with regard to the allegedly fraudulent transactions remained to be established, and that the matter had been referred to law enforcement agencies. 

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While analysts were left guessing as to the details of the alleged fraud, it reflected deeper problems in a state-owned banking sector that has been struggling with a snowballing problem of non-performing corporate loans, said Srikanth Vadlamani, senior credit officer at rating agency Moody’s.

“There are significant corporate governance issues in these banks, which have translated into operational issues,” he said. “That’s a structural problem and not enough has been done to address it.”

With assets of Rs7.3tn ($113bn) at the end of the last financial year, PNB is the second-biggest by that measure of India’s state-controlled lenders, which account for roughly two-thirds of bank assets in the country. 

The quality of oversight at state banks has come under heavy scrutiny in recent years as their bad loan ratios have soared, forcing the government to announce a $32bn recapitalisation plan in October. Analysts attribute the crisis largely to bank management’s failure to carry out proper assessments of client risk.

PNB’s announcement came five days after State Bank of India, the country’s biggest bank, reported a first quarterly loss in 17 years, while revealing that the central bank had concluded SBI had understated the value of its bad loans by $3.6bn.

On Monday, Bank of Baroda, the third-largest state bank by assets, said it would close its operation in South Africa, where it has come under heavy scrutiny for loans to the powerful Gupta family. The Guptas have been accused of using a friendship with President Jacob Zuma to control state contracts, claims they and Mr Zuma have denied.

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Observers including Raghuram Rajan, former central bank governor, have called on the government to grant greater autonomy to the state banks, arguing that this will enable them to develop stronger internal governance systems.

“The government has talked about things like improving credit culture, but I don’t think the solution is for the government to tell the banks what to do,” Mr Vadlamani said. “What is required is that the banks have significant capacity of their own, but we don’t see that capacity-building happening.”