Sucheta Dalal :Ignorance Is Not Bliss (6 Oct 2003)
Sucheta Dalal

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Ignorance Is Not Bliss (6 Oct 2003)  

For decades, the Reserve Bank of India has adopted an ivory tower approach to regulation. It does not seek market intelligence and invariably misses major scams. However, unlike the Securities and Exchange Board of India, which has often come in for scathing criticism, the RBI has been protected by its very silence.

Two Joint Parliamentary Committees (JPC) had pulled up the RBI for sleeping on its job. It failed to gauge the extent of the rot in Non Banking Finance Companies and the cooperative banking sector and couldn’t prevent their large-scale collapse. It gave a provisional banking licence to CR Bhansali, after having rejected applications by the Tatas, Birlas and Ambanis; it failed to act decisively in the Nedungadi Bank case for an entire decade and quickly ordered a merger with Punjab National Bank to avoid controversy. It forgot to regulate Overseas Corporate Bodies (OCBs) that it has registered, often with a $ 10 capital, and they merrily manipulated the stock market leading to another scam. The Madras High Court (in the MCC case) has called it “gullible” and accused it of failing to “act with vigour, range, depth and speed that the law required of it, for protecting the public interest”. Yet, the Reserve Bank, India’s most opaque regulator suffered barely a dent to its reputation. And that was only because of its silence and its secrecy.

All that has changed in 12 months, when it issued letters of support, endorsement and reassurance on behalf of three private banks — ICICI Bank, Centurion Bank and most recently Global Trust Bank (GTB).

In September last year, an RBI release ‘welcomed’ the cleaning up of Centurion Bank’s balance sheet. It said that although the balance sheet showed an overall loss, the clean up was “essential for the sound functioning of the bank and the good health of the financial system”. The bank had just appointed former RBI deputy governor Janakiraman as its chairman and was looking at a change in management so the RBI statement reassured depositors.

In April 2003, RBI stepped in to scotch the bizarre run on ICICI Bank. It issued a brief statement saying that ICICI Bank had the liquidity to meet withdrawal demands and that its “financial position is also sound”. This well warranted reassurance quickly ended the panic that had seen depositors empty out scores of ATMs in Gujarat and Maharashtra.

Last week (September 30), RBI issued a statement captioned “RBI welcomes cleaning up of balance-sheet” of GTB, which said that the bank had made “special efforts” in recovering non-performing assets (NPAs) “in accordance with RBI guidelines”.

It noted that although the financial statement showed an overall loss, the bank had made an operational profit. It also “welcomed” the GTB board’s decision to ‘clean up the balance sheet’.

There can be no objection to RBI issuing a statement aimed at preventing panic because of the huge net loss of Rs 272 crore (at end March 2003) and provisioning of Rs 309 crore. But the central bank’s sweeping endorsement, which glosses over serious issues is worrying in the context in which it was issued.

For instance, if GTB made “special effort” to clean up its balance sheet, why had the three directors in its audit committee resigned just before the results were declared? The GTB management trotted out the age factor to explain the exit of Venkappa Agadi, who headed its audit committee; but what about JV Shetty (former chairman of Canara Bank) and SB Ghosh (former Sr. Partner of PriceWaterhouse) who also quit? Would it not be fair to assume that provisioning that was ‘welcomed’ by RBI as a “special effort” did not pass muster with some of its important independent directors?

The RBI’s failure to mention the resignations or to declare why they quit makes a mockery of Corporate Governance regulations and the role of independent directors. Maybe NR Narayana Murthy, who headed SEBI’s Corporate Governance Committee, will take up the issue with RBI’s central board, where he is a director.

The RBI also seems to have forgotten it is not the bank’s only regulator and that GTB’s depositors are not its only stakeholders. The bank is listed on the stock exchanges and subject to regulation by the SEBI. Moreover, SEBI had recently moved GTB to the Trade-to-Trade (T-to-T) segment, to curb excess volatility. The RBI press release, propelled the GTB scrip up 7.8 per cent on the day it was issued, despite the huge loss. The surge would have been substantially higher had the scrip not been in the T-to-T segment. Isn’t the RBI then responsible for talking up the scrip? And did the central bank, which has a deputy governor on SEBI’s board discuss the release with SEBI before it was issued?

The RBI claim about a “special effort” at cleaning up the balance sheet also bears scrutiny. Under cover of the RBI release, the bank’s managing director Sudhakar Gandhe told a newspaper that “All the problems of the past have been sorted out”.

This suggests that its close association with Ketan Parekh, First Global and other scamsters, which saw it outrageously accommodating the sanction and diversion of funds towards stock market manipulation, is in the past.

But documents filed before the Debt Recovery Tribunal at Bangalore (available with me) show that it lent Rs 38.5 crore to Shonkh Technologies, in February 2001, well after the scam related investigations have begun. This company is notorious for its association with Ketan Parekh and for privately placing expensive equity with Unit Trust of India. GTB has alleged that the company, after claiming the money has even closed its Bangalore office and a couple of initial cheques paid by it had bounced. It now owes GTB a whopping Rs 48.92 crore.

Have the RBI inspectors noted the fresh lending to shady companies? Were the directors who resigned upset about it? Our sources say that the NPA provisioning may have been higher and the disagreements were about continued support to a television company and a large south-based group, which already has plenty of bad loans in GTB’s books.

We can safely assume that the RBI release will now allow these loans to be shoved under the carpet. This will not do. So long as GTB remains a publicly listed company, the RBI would have to coordinate its recommendations and endorsements with other regulators, failing which, SEBI should scrap its corporate governance code, which only forces the better run companies to observe endless compliance and disclosure regulations.

-- Sucheta Dalal