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Punjab National Bank’s Mega-Fraud Leads Sector Away From SMB Finance

The fallout from what Reuters reports described as “mega-fraud” at India’s Punjab National Bank (PNB) continues, with small- and medium-sized businesses (SMBs) still struggling to access financing as the financial institution (FI) tightens its grip against risks. The publication noted Wednesday (May 16) that the $2 billion defrauding of state-run PNB has led to a lowering of credit available to SMBs across the industry as a whole.

Reports emerged earlier this year that PNB had fallen victim to a major fraud scheme linked to loan guarantees, eventually becoming one of the largest banking scandals in the nation’s history. The data suggests that FIs across India have reduced SMB financing in the wake of the PNB scandal, a space which has declined by 0.2 percent between February and March despite a nearly 6 percent national economic growth during the same period. The same timeframe last year saw SMB lending grow 5.8 percent.

“Everybody is cautious,” said one unnamed bank branch manager at a state-run bank. “We are following the exact rulebook so that there’s no deviation. After the PNB scam, vigilance levels are very high and bankers are scared. I had overlooked some rules earlier just to help a business in distress. I cannot do it now.”

Bankers that spoke with Reuters noted that more stringent rules from the Reserve Bank of India — related to how to identify and manage stressed loans — have also had an impact on SMB lending. The industry has discontinued use of letters of undertaking, a form of trade finance used in the PNB fraud, which has significantly impacted small business borrowers.

“I cannot give loans on relationships,” said another unnamed branch manager. “We need to be strict or else, after a few years, I might be arrested.”

A pullback from financing is only the latest in a slew of challenges for small businesses in India, which have also been tasked with managing tax reform and the sudden demonetization of paper notes in the economy.

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