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Fallout from India's largest bank fraud extends to trade finance market

Foreign banks are more hesitant in accepting letters of guarantees from Indian banks that cover trade financing loans to smaller businesses in the country, following the emergence of India's largest banking fraud, Bloomberg reported Feb. 27, citing "people with knowledge of the matter."

India's finance ministry also set a 15-day deadline for state-owned banks to identify and tackle operational and technical risks, Reuters reported the same day, citing a senior official.

HSBC Holdings Plc, Standard Chartered Bank, Citigroup Inc., and Deutsche Bank AG are among the foreign lenders reducing their exposure to trade financing in India, sources told Bloomberg. Rates have risen by as much as 0.5% for some types of financing, sources added, due to uncertainty over the creditworthiness of guarantees from state-owned banks.

This comes after Punjab National Bank's disclosure of a US$2 billion fraud that involved fake letter of guarantees.

The move has raised the pressure on smaller businesses, which often rely on trade funding to plug gaps in their trading cycle, before they receive delivery of goods or payment. Large companies with direct access to funds from foreign lenders are not affected, sources added.

India's central bank has asked foreign lenders to resume trade loans, they noted, with the crunch appearing to hit the rupee. The Indian currency has weakened 2% in February, the biggest decline in Asia-Pacific for the month after the Indonesian rupiah.

The central bank did not respond to queries, the news outlet said.

Meanwhile, Rajeev Kumar, secretary in the finance ministry's department of financial services, tweeted state-owned banks have 15 days to "take pre-emptive action and identify gaps/weaknesses" over risks, Reuters noted.