Foreign lenders review counter-party limits on Punjab National Bank

This, after rating agencies are reportedly placing PNB's rating under watch for a possible downgrade

Foreign banks have begun to review bilateral sanction limits with Punjab National Bank (PNB), after rating agencies Moody's and Fitch placed their earlier assessment of the government-owned lender’s under watch for a possible downgrade.

This had followed the Rs 114-billion fraud revelation at PNB, involving some of its own employees fraudulently issuing Letters of Understanding (LoUs), a trade finance instrument, for entities controlled by jeweller Nirav Modi.

An LoU is a type of guarantee a bank gives a customer, to allow the latter to raise money from another Indian bank's foreign branch, in the form of short-term credit.

PNB held a meeting with foreign banks on Friday. It assured them it was robust enough to meet any legitimate claims from other banks for the issued LoUs. And, that it had taken steps to improve the earlier risk management systems.

The fraudulent LoUs were transmitted via the SWIFT (Society for Worldwide Interbank Financial Telecommunications) messaging network used by banks globally but without approval of PNB’s competent authority and legal documentation. They were also not entered into the bank's Core Banking System.

Foreign bank executives said PNB told them its core banking platform, Finacle, and the SWIFT link would be completely integrated by the end of next month. Already, SWIFT messages are being routed through a three-layered -- maker checker and verifier – structure for the entire bank. All smaller branches will now use its central processing centre, PNB said.

J Akilan, executive director and chief representative in India of Spanish bank BBVA, said well-rated and well-managed lenders would have no issue in adequate counter-party limits with global banks, to ensure bilateral trade was smooth and their clients well-serviced. Ill-managed ones might not find it easy.

Global rating agencies Fitch and Moody’s had said last Tuesday that they were placing PNB under watch for a possible downgrade. Moody's placed the bank's Counterparty Risk Assessment under review for a downgrade. It cited the risk of a weakening of the standalone credit profile, due to discovery of the fraudulent transactions. Fitch has placed PNB’s viability rating of 'BB' on ‘Rating Watch Negative’. It is waiting for more clarity on the extent of control failures and the impact on PNB's financial position.