Sucheta Dalal :Cowboy Culture Takes Over Banking (9 September 2002)
Sucheta Dalal

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Cowboy Culture Takes Over Banking (9 September 2002)  

Some companies seem to have no problems raising funds. Himachal Futuristic Communications (HFCL), despite all controversy surrounding its funding of Ketan Parekh and involvement in Scam 2000, apparently finds many takers among foreign investors. The company quietly raised $50 million through a Gross Depository Receipt placement last week, albeit at a discount to its recently inflated market price of Rs 55 a share. The surprise is that it found any investors at all, given the intense competition in the telecom business and its tattered reputation.

But there is nothing new in that. In the past, it has had banks and institutions break all their internal rules to fund its activities. So much so that Global Trust Bank (GTB) gave its middle name a new meaning by demonstrating deep implicit ‘trust’ in three of its clients –– HFCL, the Ketan Parekh (KP) group and the Zee Television group.

We have now managed to get access to GTB’s internal investigations that reveal the extent to which the bank was willing to ignore banking regulations and guidelines to fund these three groups during 1999 to 2001. Since then, the bank has sacked six officials including former executive director, Sridhar Subasri, who was apparently the key co-ordinator of all decisions connected with these groups. This included decisions to waive documentation; lend far beyond bank limits, release funds at midnight, permit their immediate transfer to Ketan Parekh’s account and to do all this on the basis of oral approvals.

Interestingly, Subasri has defended such verbal instructions and in fact, all his actions, as either being most normal to GTB’s "flexible and liberal environment", or ‘in its best interests’. He also ordered cheques to be discounted far beyond branch limits and wrote off Rs 20 crore lent to the Balaji group, including a subsidiary, which probably exists only on paper. But Subasri urges investigating officials to look at the larger picture rather than individual loans.

For example, in the case of Rs 385 crore released to HFCL and two subsidiaries between July 2000 and March 2001, which were immediately transferred to Ketan Parekh’s account, he says –– if the company transferred money to the KP group, then the latter had been transferring similarly large sums of money to HFCL’s accounts too. But the bank neither thought it fit to investigate these transactions or worry about a possible nexus between the two groups. Instead, Subasri argues that since HFCL had accounts with GTB since 1999 and often had large deposits with it, the loans were considered unexceptional despite scanty documentation and unclear end-use of funds.

Again, the seasoned banker wants no correlation with the fact that the KP-led bull frenzy, with HFCL as one of his favourite stocks, had begun in 1999. This allowed the company substantial access to money, which was probably deposited with the bank. But the situation changed dramatically in early 2001 and the bank took no steps to protect its interests. In fact, in one reply to the bank, Subasri argues that money is fungible and once a company receives a loan, it is free to use it as it wishes. He goes on to say that "it is not always possible nor desirable to get entire information from clients". Such replies make you worry about the sort of cowboy culture that is apparently being fostered by aggressive private banks.

For instance, Rs 250 crore was lent to companies of the Zee TV group at 9:30 pm on March 8, 2001. The entire amount was immediately diverted to stock market operator Ketan Parekh on the same day to repay his market liabilities. On March 31, these loans were closed and fresh loans for the same amount were issued to another set of companies. But Subasri laconically argues that the use of funds was not known to GTB because "the group was unwilling to divulge details" of the strategic acquisitions it had planned. He argues that a company has complete flexibility regarding end-use in what GTB calls ‘corporate loans’. He simply ignores that fact that Zee was a first time borrower from GTB and its loans were used merely to feed market losses of KP and his corporate cohorts.

The bank was so eager to bail out, accommodate and bank-roll Ketan Parekh that, during the crucial period of February 2001, it released securities under its custody to allow him to make payments elsewhere. It also allowed KP to replace good securities pledged with the bank with bad and illiquid ones, thereby jeopardising its own finances.

But for all the bizarre arguments that Subasri proffers, he makes a confession of sorts in his letter of April 19, 2002 addressed to the GTB board of directors. In that he seems to abandon the argument that all his decisions were sound and says that even if companies diverted funds to KP, it was in the interest of the bank. "We were aware that KP was then in the troubled zone and his group’s failure would mean Bank’s exposure to his group of about Rs 240 crore would be in peril. Further, GTB had a dominant market share in the capital market, and a chain of failures in the broking segment, could cause a broking exposure of Rs 150-Rs 200 crore going bad." He points out that unlike manufacturing, where companies die a slow death, a "broking exposure collapse is usually as in an explosion".

He says, in February-March 2001, with the press not being friendly and the bank’s "Rs 400 crore ‘at risk’ exposure to the capital market could have shaken the confidence of the bank." Clearly he feared a run on the bank. Hence, he says, whatever the objective in the specific lending proposals and their ultimate cash flows (or diversion of funds to the KP group), it was all in the best interests of the bank.

It is really for the central bank and the Joint Parliamentary Committee to decide if such cowboy banking and broker nexus is in the interest of the country. But they are taking their time to make a decision. In the meanwhile, Subasri justifies his preposterous actions with a bit of inane verse, which is worth reproducing to understand his sheer brazenness:

Every river runs its course and ends in the Sea.

However, till it reaches the Sea,

It has a distinct name of its own, distinct identity,

Character and utility, through the course of its flow.

Just because all rivers end up in the Sea,

We do not call all rivers as Sea itself.

-- Sucheta Dalal