India’s second-largest state lender Punjab National Bank has reported a Rs38bn ($556m) fraud, raising questions about the health of India’s public sector-dominated financial system only a year after one of the country’s biggest scandals rocked the same bank.

Punjab National Bank said that investigators and forensic auditors uncovered an alleged fraud in the account of Bhushan Power & Steel, a steelmaker undergoing bankruptcy proceedings. 

The fraud extended internationally, the bank said, with $50m worth of alleged fraudulent borrowings from a branch in Dubai and a further $39m from Hong Kong. The bank said it had reported the scam to the Reserve Bank of India, the country’s central bank. 

Bhushan Power & Steel “has misappropriated bank funds, manipulated books of accounts to raise funds from consortium lender banks”, the bank said in a regulatory filing. Bhushan Power & Steel did not respond to a request for comment.

The lossmaking Punjab National Bank, whose assets total about $113bn, was last year at the centre of one of India’s largest political and financial controversies after it reported that companies associated with celebrity jeweller Nirav Modi were allegedly behind a fraud worth about $2bn. 

The two scandals have highlighted concerns about corporate governance standards at the heart of India’s banking system, in which public lenders account for roughly two-thirds of bank assets.

Some economists and business leaders have called for the privatisation of state lenders, arguing that publicly controlled banks are liable to make politically motivated lending decisions, adding to a precarious pile of non-performing loans dished out to powerful industrialists. 

The government under Prime Minister Narendra Modi has so far resisted calls to privatise banks, opting instead to introduce a tough new bankruptcy and insolvency law in 2016 designed to strengthen the rights of creditors. 

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Punjab National Bank’s share price is trading at less than half its peak in early 2018 before the Nirav Modi scandal was revealed. 

Authorities charged more than 20 people over the scandal, including the bank’s former chief executive. The government is trying to extradite Mr Modi and one of his associates back to India after they left the country. 

Bhushan Power & Steel, meanwhile, was one of 12 companies that the Reserve Bank of India forced into bankruptcy proceedings in 2017 under the country’s landmark insolvency law. 

But the law, hailed as a means to help banks swiftly recover loans that would previously most likely have been lost for good, has come under severe strain. Cases are supposed to be resolved in 270 days, but many — including Bhushan Power & Steel’s — have dragged on far longer.

Via Financial Times