Trade Finance Takes Hit From India’s $2 Billion Bank Fraud Fallout

The fallout continues from the $2 billion fraud scandal that hit India’s financial services market, according to news from Bloomberg on Tuesday (Feb. 27), with consequences now spreading to the trade finance industry.

Unnamed sources told the publication that foreign financial institutions are turning away from their partners in India to reduce their exposure to risks from India’s state-run banks, with financial institutions (FIs) questioning the creditworthiness of Indian bank guarantees. In the wake of the fraud scandal, rates increased as much as 0.5 percentage points.

Citigroup, Deutsche Bank, Standard Chartered Bank and HSBC are all looking to reduce their exposure to trade finance transactions in India, the sources said.

It’s a direct result of revelations from India’s Punjab National Bank (PNB), which disclosed a $2 billion fraud scheme earlier this week involving fake letters of guarantee, reports said. The sources noted that large Indian firms that have access to financing directly from foreign institutions aren’t affected, but small businesses, which often need the financing from local FIs to conduct trade, could be hit the hardest.

The publication explained that India runs a trade deficit requiring a flow of dollars to finance trade. The International Chamber of Commerce’s Global Survey, released last year, found India to be among the world’s largest users of trade finance.

PNB first disclosed earlier this month that “a few select account holders” are apparently involved in the alleged fraud, and the FI has since filed a complaint with the Central Bureau of Investigation. The bank is accusing jeweler Nirav Modi, among other account holders, of using fake shell companies to procure PNB guarantees used to receive funds from outside India, unnamed sources told Reuters at the time.

“So far, there is no clarity on the impact on the lender’s bottom line from this,” said Ashutosh Kumar Mishra, a Mumbai-based banking analyst at Reliance Securities Ltd, in an interview with Reuters. “There is no clarity on whether these transactions are reversed, whether the bank is holding collateral that could back part of these transactions or whether enforcement authorities will be able to recover this amount.”