Rajnish Kumar, chief executive officer of State Bank of India Ltd., speaks during a panel session on day two of the World Economic Forum (WEF) in Davos. (Photographer: Jason Alden/Bloomberg)

$2 Billion Bank Fraud Is Barings Redux for Biggest Indian Lender

(Bloomberg) -- The chief of India’s biggest bank called for an industry-wide review of risk controls in day-to-day operations, comparing a $2 billion fraud at one of his rivals 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.”

$2 Billion Bank Fraud Is Barings Redux for Biggest Indian Lender

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 jewelers, 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.

$2 Billion Bank Fraud Is Barings Redux for Biggest Indian Lender

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 500 million rupees ($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 scam, 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.

“There is no reason for yields to be so high,” Kumar said. Inflation will stay within the central bank’s comfort zone and the government’s borrowing program is “manageable,” he said.

‘Idiosyncratic’

Loan growth accelerated to about 11 percent 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.

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. However, Kumar expects the amount of bad loans in India will reduce in the year starting April 1 as lenders and companies push through the insolvency process.

“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.”

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