RBI taps top banks including HDFC, ICICI, and SBI for blockchain-based trade financing project

HDFC Bank,?ICICI Bank?NSE 1.20 %, and?State Bank of India?NSE 0.71 % are among nearly a dozen top lenders the central bank is engaging with to run a blockchain-based pilot project centered on trade financing. If successful, it could help prevent loan frauds by the likes of Nirav Modi and Mehul Choksi, fugitive borrowers that gamed the system to siphon off thousands of crores of rupees.

“We are participating and supporting the initiative,” said a Bank of Baroda spokeswoman.

The RBI, other banks, and technology partners did not respond to ET’s queries.

Different technology providers are engaging with select individual banks under the stewardship of the RBI.

“This is to assess how blockchain can facilitate and secure our banking system,” said one of the persons cited above.

Preventing LC Fraud

Tampering of documents like Letters of Credit (LC) is one of the project’s focus areas, and blockchain technology can help prevent the misuse of LCs.

The objective is to make blockchain technology a part of the Core Banking System (CBS). This particular project will test the application of the technology before it becomes established practice.

“The pilot has begun with banks to run blockchain-backed systems to issue digital LCs,” said an executive involved in the process.

Blockchain technology is increasingly gaining significance in the banking system. The RBI is likely to use the same technology for the proposed central bank digital currency project, too.

However, the pilot project focused on trade financing is different in scope and application from that involved in building a digital currency.

About two weeks ago, the RBI Innovation Hub, a wholly owned subsidiary of the central bank, conducted a three-day workshop with banks in Mumbai where participating lenders were given hands-on trading on Distributed Ledger Technology (DLT), said one of the people cited above.

Blockchain is a distributed ledger that uses independent computers to record, share and synchronize transactions in an electronic ledger, according to the World Bank.

About a year ago, 15 banks had come together to establish a new company that was supposed to use blockchain technology for processing LCs. The company, christened Indian Banks’ Blockchain Infrastructure Co (IBBIC), was meant to bring blockchain technology to the forefront of the banking system in the aftermath of the LC scandal at the?Punjab National Bank?NSE 0.83 %. The current status of the proposed company is not clear.

“We do not know what is happening there as this RBI pilot project could well be an alternative,” said an official working in the blockchain space.