The government will also examine and shut down all non-viable offshore operations of state banks to cut costs.The magnitude of the PNB fraud has left policymakers and industry worried about the stability of the Indian banking system. Credit: ReutersNew Delhi: Rattled by the over Rs 11,000 crore Punjab National Bank (PNB) scam, the Narendra Modi government has ordered the closing of 35 overseas branches of public sector banks (PSBs) as the latter’s role in the country’s banking fraud continues to stay under the spotlight.Foreign branches of public sector banks like State Bank of India and Allahabad Bank provided loans to Nirav Modi-promoted companies against fraudulent Letters of Undertaking (LoUs) issued by the PNB’s Brady House branch in Mumbai.The government has ordered the shutting down of 35 overseas branches over viability and profitability, TV channels reported citing the banking secretary.Meanwhile, as many 69 international branches of PSU banks and their foreign offices, arms and JVs are being examined for closure, the reports added.The government is looking to consolidated PSBs’ overseas operations in the same geography, the reports said.The government is planning to close all the non-viable operations overseas for cost efficiency and synergy, the reports added. A committee headed by four-five bankers had recommended closing the international branches which are low on profitability.Significantly, the magnitude of the PNB fraud has left policymakers and industry worried about the stability of the Indian banking system which is already saddled with bad loans.The problem is more severe in PSBs which account for nearly 90% of total bad loans of the Indian banking system.Also read:As the PNB scam drama fades, how difficult will it be to recover the money and prosecute Nirav Modi?Punjab National Bank says scam may cost it nearly $2 billionTo push for privatisation as a solution to the PNB scam is to ignore history, problems of private bankingThe market value of PSBs has been falling ever since the Modi took charge in May 2014. The combined market cap of all listed PSBs is now less than that of one private lender, HDFC, despite the government unveiling reform measures like Indradhanush scheme and Insolvency and Bankruptcy Code (IBC).The government had promised to infuse Rs 70,000 crore to help PSBs meet Basel III norms that kick in from March 2019. It also created a bank board bureau under former comptroller and auditor general (CAG) Vinod Rai to streamline appointment of top management in PSBs.Last October, the government announced a Rs 2.11 lakh crore-recapitalisation plan for PSBs. The plan includes infusion of Rs 1.35 lakh crore through recapitalisation bonds, and the balance Rs 76,000 crore in the form of budgetary support.The IBC’s impact is yet to be felt on the ground.Even as reform measures are yet to show concrete results, mega PNB scam has thrown spotlight back on weaknesses in PSBs’ internal regulations.Under the modus operandi adopted for PNB fraud, one junior level branch official unauthorisedly and fraudulently issued LoUs on behalf of some companies belonging to Nirav Modi Group for availing buyers’ credit from overseas branches of Indian Banks. Significantly, none of the transactions were routed through the Core Banking Solution system, thus avoiding early detection of fraudulent activity.LoU is a bank guarantee and is issued for overseas import payments. while issuing LoU for a client, a bank agrees to repay the principal and interest on the client’s loan unconditionally. When an LoU is issued it involves an issuing bank, a receiving bank, an importer and a beneficiary entity overseas.