Sucheta Dalal :All the bidders for a troubled bank
Sucheta Dalal

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All the bidders for a troubled bank  

Sep 11, 2006

Just a fortnight ago, when United Western Bank (UWB) topped the first-ever customer satisfaction survey of banks, the findings and timing of the survey seemed outlandish. Good customer service at the branch level can indeed be distinct from bad management that ruins profitability, but this logic is hard to accept, especially when the Reserve Bank of India (RBI) soon places the bank under moratorium. A few days later the picture changed again. The snaking queues of panic-stricken depositors quickly vanished and UWB seemed on the verge of setting a record in terms of the number of entities jostling to take it over. All this when the real recoverability of its loans is unknown and revival cost cannot be realistically estimated.


A cash-strapped Maharashtra government’s support has led to the offer of a Rs 210-crore revival package of which Rs 70 crore will come from the curious combination of Housing Development Finance Corporation (HDFC), Infrastructure Development Finance Corporation and the state financial institution — SICOM Ltd. Other bidders are Citigroup, Standard Chartered, ICICI Bank, Canara Bank, Federal Bank, Andhra Bank, Allahabad Bank, Industrial Development Bank of India and UCO Bank. The savvy HDFC Bank is the only frontline bank that has not bid for UWB. Was it asked to stay away by its significant shareholder?


Then there is Indiabulls, an aggressive brokerage firm that hopes to become a bank by acquiring UWB. Behind several of the bids are covert and overt political supporters, who either want to keep control or acquire control of a bank. The media is also pitching in with opinions to support certain bidders.


The list of suitors is so long that it seems set to bury important questions such as why the RBI did nothing as the bank kept piling on bad loans and a former investment banker tried to acquire the bank, probably on behalf of an industrialist. The capital market regulator and stock exchanges also failed to prevent brazen price manipulation for almost a year that allowed UWB to price its recent rights issue at a premium even when losses were mounting.


All this does not augur well for the process of selecting a sensible acquirer who would do well by all the bank’s stakeholders. In fact, it points to the likelihood of political interference. Otherwise, UWB’s acquirer is most likely to be decided by a process of elimination.


For starters, there is enormous pressure to eliminate all banks that have been penalised in the IPO allotment scandal and are not allowed to open new branches. In fact, they triggered the initial rush of suitors for UWB since the winner could hope to for a sudden, 230-branch expansion with a strong presence in rural Maharashtra.


The RBI’s alleged decision to punish banks by barring them from opening new branches itself needs some discussion. One uses the word ‘alleged’ because banks deny media reports about the three-year ban, while the RBI is officially silent on the issue. It is indeed a fact that these banks have not been allowed to expand for almost a year and no permissions are on the horizon either.


Until recently, the RBI has never been such a stickler about rules and procedures either. Or else, bank after bank would not have collapsed under the burden of dubious lending practices. Moreover, the Securities and Exchange Board of India’s seemingly hard-hitting initial order on the Demat Scam has already been considerably diluted since then. The RBI’s initial reaction was to impose a paltry penalty that was not even a slap on the wrist. But although one is in favour of stringent monetary penalties that act as a real deterrent to indiscipline, the damage caused by a three-year ban on expansion, when the economy is growing at 8 per cent seems excessively crippling.


In fact, each of the banks that have been punished, would probably have willingly paid penalty running into crores of rupees rather than suffer the incalculable damage caused by halting growth through branch expansion. But unlike the storm of protest that is raised by every Sebi order, the banking sector does not even dare to voice a protest against RBI decisions. In contrast, Sebi has even faced the ignominy of being fined by the appellate tribunal. Clearly, the RBI needs to revisit some of its statutes to align them with the changing economic environment while giving it more flexibility in decision-making.


Coming back to the UWB issue, if one excludes the IPO-tainted banks, it leaves a few foreign banks and certain public sector banks in the running, plus, of course, the Maharashtra government-led revival plan.


The last mentioned ought to have the least consideration, despite HDFC’s presence to lend it credibility. Firstly, the grapevine says that political interference in lending decisions were responsible for the collapse of UWB’s finances. Giving the bank another chance at revival, after it has several rounds of public money without adequate transparency will be hugely controversial. As for HDFC’s contribution to the bid, it is not relevant since the mortgage financier already has a significant stake in HDFC Bank.


That leaves only the untainted nationalised banks, the foreign bank bidders and Indiabulls. The latter two require a serious change in the RBI’s policy, which is very unlikely to happen overnight, especially when the central bank is under pressure to make a quick decision and there are plenty of other options. That leaves only a few nationalised banks in the race. My sources among banks and regulators say that RBI will settle for a bank with the strongest balance sheet, which has travelled some distance from its last scandal. As things stand, the banking industry will probably be willing to bet that Canara Bank will ultimately walk away with UWB and bury the issues.


-- Sucheta Dalal