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Will Blockchain Technology Block the LC Frauds ?
by Hargovind Sachdev, Ex GM, State Bank of India & Head of Central European Credit Desk of SBI, Frankfurt, Germany.

Will Blockchain Technology Block the LC Frauds ?


“If you see fraud and turn a blind eye and do not say fraud, you are a fraud.”

Inspired by the evolution of Blockchain technology, bankers have decided to catch the bull by its horn and call the fraud a fraud to form the Indian Banks’ Blockchain Infrastructure Company Private Limited” (IBBIC) to harness block-chain to protect the Letters of Credit (LCs), GST invoices and e-Way Bills from frauds. It is a revolutionary step. It would mitigate the operational risks of banks and add value to the nation's GDP. 

State Bank of India along with ICICI Bank, Kotak Mahindra Bank, Axis Bank and 11 other banks have adopted the fraud-free, fool-proof Blockchain technology to check, recheck and cross check the genuineness of sale and purchase transactions. Issuing LCs would lead to fault free LC discounting. It will nip in bud the ulterior motives of opening two LCs on a single invoice by two different banks by a scheming customer in a consortium. Attempts to misuse Invoices shall be easily curbed because alerts shall flash in case LC is opened on the same invoice by another bank. 

The  system is scalable and open to all banks and later to NBFCs who provide LC Bill discounting and trade finance. For MSMEs, this could be a game-changing innovation due to accessibility, accuracy, genuineness and speed. Before the implantation of Blockchain all participants have been maintaining  individual ledgers with duplication and discrepancies that result in disputes, longer settlement times, and interference of costly intermediaries with their associated overhead costs. By using blockchain shared ledgers, where transactions cannot be altered once validated by consensus and written to the ledger, businesses shall save time and costs while reducing risks.

Current business ledgers in use presently are deficient in many ways. They are inefficient, costly, and subject to tampering. Having to resolve disputes and provide insurance for transactions is costly. These risks and uncertainties are contributing to large scale generation of NPAs. Blockchain can be a solution to such delinquencies.

As per IBM, the world leader in technology, a blockchain is a tamper-evident, shared digital ledger that records transactions in a public or private network. Blockchain acts as a single source of truth, and members in the network can view only those transactions that are relevant to them. Like the members of WhatsApp groups, the encrypted information is available to members of individual groups only.


Blockchain is a software that can be installed on any computer worldwide. The service provider of software charges hourly fee of around USD 25 for every hour of use. The subscribers of  Blockchain are given access to a block of space on the software. This block is fed with identical information shared identically with all participants of the Group on a real time basis. Unlike other databases, which have someone incharge who can change the entries, Blockchain is different because nobody is incharge. If one block in the chain is modified, it becomes immediately apparent that it has been tampered with. If hackers want to corrupt a blockchain document, they would have to change every block in the chain, across all of the distributed versions of change. Since there is no common source, like in the case of airlines or bank servers, and information is distributed equally, the block chain is impregnable to phishing and cyber attacks. By joining the Letter of Credit software, the fifteen banks will be chained together in sharing details of Invoices, LCs, eWay Bills simultaneously. Such chains of info shared blocks are called Blockchains. 

Under Blockchain, shared digital ledgers are opened for participants within their blocks. A  shared digital ledger is a database on cloud that is available to compartmentalise the information on various subjects. Such a ledger, records the transactions of opening of LCs by participant Banks, Issue of GST Invoices and e-way Bills by Corporates against which LC has been issued. Banks can access to operative/archived/paid LCs and Invoices by other banks to avoid duplication and double payment after ascertaining genuineness on Blockchain. Participants interact freely by consensus on ledger records. No central authority or third-party mediator or clearinghouse is involved. Every record in the distributed ledger has a timestamp and unique cryptographic signature. It carries an auditable, immutable history of transactions, which capture and reveal  details of participants like buyers, sellers, and intermediaries (such as banks, merchant traders and manufacturers) whose business agreements like LCs, BGs, contracts and invoices and payment history are permanently recorded in ledgers.


Distributed to all member nodes in the network, the ledger permanently records, in a sequential chain of cryptographic hash-linked blocks, the history of transactions that take place between the participants in the network. All the confirmed and validated transaction blocks are linked and chained from the beginning of the chain to the most current block. Instead of relying on a third party, such as a financial institution, to mediate transactions, member nodes in a blockchain network use a consensus protocol to agree on ledger content using cryptographic hashes and digital signatures to ensure the integrity of transactions. Digital signatures ensure that transactions originate from members not imposters. A blockchain is programmable, all records are individually encrypted.  Identity of participants is anonymous or pseudonymous. All validated records are irreversible and cannot be edited or modified.


Already more than 1500 celebrated IT players are providing Blockchain software worldwide. Led by IBM, Coinbase, Bitfury, Chronicled, Unicsoft, SoluLab, Eleks, Labrys, Idealogic, Adoriasoft and Quest Global, software companies are customising operations in millions of organisations by chaining safe blocks to avoid cyber piracy. Among Indian companies, Infosys, Tech Mahindra, TCS Zansaar, Hyperlink and Ajith Infotech have more than 50 million users worldwide who are avoiding data theft due to this technology. Among the most popular users of Blockchain are ERP, Hospital Management, Shipping Industry, WareHouse Management, Live Chats, Animation, CRM, HR, Payroll, eCommerce and Speech Recognition businesses.


Blockchain is a truly disruptive technology that can transform business networks. It provides near-real-time reference data and consistent dataset with reduced errors. Risk free and transparent the blockchain leads to lowered cost of audit and regulatory compliance. The contracts  executed on business networks using blockchain are automated and final, enabling businesses to benefit from increased speed of execution, reduced costs, and lower risk, all of which enable business to expand to new horizons.


Summarily speaking, trade finance data involved in LC business shall be available on net for cross verification as a permanent record. Banks will no longer depute officials to LC issuing banks to verify the genuineness  before discounting. The risk of opening LC against fake invoices will be eliminated.


Bitcoins and Ethereum are continuously growing because they cannot be faked, hacked or double spent as these are based upon Blockchain technology.  Similarly banking products like LC and BG are going to be safe instruments of trade with Blockchain. The country shall enrich from enhancement in trade transactions  imbibing liquidity, efficiency and prosperity through secured firewalls. The  TAT for trade transactions would improve making customers run laughing to the banks. The adoption has the potential to take the GDP of the nation to the next level.


Rightly said, ”The Internet is a fulfilling gift, sadly opening doors to many crimes. Through Blockchain, we can bolt vulnerable doors to stay ahead.”


(Mr. Hargovind Sachdev has over 39 years of banking experience having occupied senior positions in UCO Bank, United Bank of India, State Bank of Patiala, State Bank of Travancore & State Bank of India where he headed the Central European Credit Desk at Frankfurt, Germany from 2006 to 2011 covering 15 countries of Central Europe.)