New Delhi: The alleged Rs113 billion (Dh6.38 billion) fraud at state-run Punjab National Bank (PNB) committed by accused diamantaire Nirav Modi should not halt the entire system of corporate lending as demoralisation would set in among public sector bank (PSB) employees, an industry body said on Sunday.

The country can “ill-afford” such a fraud-induced credit slowdown at a time when credit growth is showing signs of recovery and the economy is set to grow at a higher pace, the Associated Chambers of Commerce and Industry of India (Assocham) said in a release here.

Noting the disturbing reports about banks clamping down certain impractical rules and procedures for trade finance, affecting both importers and exporters in the wake of the PNB scam, Assocham said the letters of credit (LOC) or letters of undertaking (LOU) allegedly misused by the diamond traders are legitimate instruments in global trade.

“While we may seek long-term solutions like privatisation of the banks, the need of this hour is to rally around honest bank officers and the honest business entities which have built trust on each other,” Assocham Secretary General D.S. Rawat said in a statement.

“Let one or a few black sheep not derail our financial system, which is resilient enough to withstand [these] kind of shocks, though ideally such jolts are better avoided and averted through systemic reforms,” he added.

According to Assocham, “letters of credit or letters of undertaking are an internationally accepted system of global trade.”

“While we need to ensure safe and sound functioning of the system and not allow loopholes like those in the PNB system of money or guarantee transfer, let banks not over-react and hit the trade and industry.”

Noting that Indian exports in January showed a deceleration in growth “even when the global economy is on the uptick”, Assocham said: “The pick up in the domestic economy would require higher imports. Thus, both imports and exports are key to our economy.”

“How else [should] we encourage investment and jobs if we do not infuse confidence and trust in our financial system? By all means, punish the offenders at a fast speed and set examples; but the business should not be allowed to halt. There is a need for vigilance among all the lenders, even in the private sector,” the statement added.

Meanwhile Finance Minister Arun Jaitley has criticised regulators, as well as bank managements and auditors, for their failure to detect bank fraud, saying “politicians are accountable but regulators are not”.

“We must always remember that regulators have a very important function. They ultimately decide the rules of the game and they have to have a third eye kept perpetually open and turned towards the sector. But unfortunately, in the Indian system, we politicians are accountable, the regulators are not,” Jaitley said on Saturday at the ET Global Business Summit here.