Censured for profit, the BoI story (4 November 2001)
Unit Trust of India continues to give the government nightmares and a second bailout looks unavoidable; IFCI has snapped up Rs 400 crores in bailout tranche-I, Madhavpura Cooperative Bank has pocketed over Rs 1,300 crore, thanks to some arm-twisting by the home minister and IDBI reportedly needs Rs 7,000 crore. So, if a once-loss-making PSU bank offers to pay back Rs 300 crore of capital to the government what would be the reaction? Congratulations? Forget it. Bank of India (BOI) is an amazing story of a nationalised bank, doing everything that the government supposedly wants banks to do; and getting a load of flak for it.
Sample this. Under K.V. Krishnamurthy’s chairmanship, the bank has turned aggressively profitable, has announced consistently good results (net profit for the Sept 2001 quarter was up 64 per cent), has surpassed six out of the seven efficiency parameters set out by the Varma Committee, and has continuously reduced its bad loans with fairly hefty provisioning (it has fully provided for the Rs 130 crore loss on account of Ketan Parekh). So what do Krishnamurthy and his team get for their efforts? A letter of displeasure from an RBI which is working overtime to cover up its own failure in supervision. There’s other nonsense also.
UTI needs another bailout and IDBI needs Rs 7,000 crore yet the profitable BoI gets censured for its efforts
A few months ago, confident about being able to maintain its excellent financial performance, BOI offered to return Rs 300 crores out of the Rs 489 crores of capital held by government — this is in line with the government policy of reducing its holdings. Yet, BOI was told that under provisions of the Banking Companies Amendment Act of 1995, the paid up capital couldn’t drop below 25 per cent of the capital on the day the ordinance was passed. This means that BOI can, at best, pay back Rs 150 crore.
BOI’s capital was a huge Rs 1,952 crores at its peak in January 1995, following a bailout through government bonds. BOI has offered to repay Rs 300 crores of capital either by cash or an adjustment against redemption. It has also said that since government holding in the bank will remain above 55 per cent even after the payback, the stipulations of the 1995 amendment need to be revised. The proposal is languishing somewhere in the bureaucratic maze of the RBI and the Banking Division.
Take for instance the RBI’s letter of displeasure to BOI during the Ketan Parekh episode. Madhavpura Mercantile Cooperative Bank, was a scheduled co-operative bank, which routed the clearing of 60 other tiny cooperative banks in Gujarat. Its chairman and his stockbroker son were in cahoots with scamster Ketan Parekh and had merrily issued bankers cheques and pay orders to him without any real cash in the kitty. Unaware of this cozy nexus, BOI’s stock exchange branch had been earning a fee by discounting these pay orders and bankers cheques (which the RBI has always claimed were as safe as cash).
In March, when the huge speculative bubble built up by Parekh collapsed, pay order worth Rs 137 crores discounted by BOI for Ketan Parekh bounced. The bank extracted Rs 7 crores from the broker, but the rest is still outstanding. The RBI then launched an inquiry, blamed BOI for inadequate management control and imprudent delegation of powers, and successfully transferred its own responsibility and failure of supervision to the bank. Did the RBI have no inkling that Madhavpura may be in trouble? We now learn that RBI had plenty of reason to be suspicious. In fact, for two months before the March collapse Madhavpura had been struggling to complete its clearing and only ‘managed’ it with some help. But no alarm bells rang. Also, just revisit what the RBI itself told the JPC — that bankers cheques are as good as cash. But if the cheques were as good as cash, why would bank officials need to be prescribed stringent ceilings for discounting such bank-to-bank cheques? When questioned by the JPC, BOI is understood to have expressed its puzzlement.
After all it was not exposed to any credit risk — the bank had not lent money to Ketan Parekh. It was not a market risk either — the bank was not speculating in the market. At best it was a settlement risk, that too because of a failure caused by a fraud.
The irony does not end here. While the bank is censured, it is also directed to listen to a ‘settlement deal’ from Ketan Parekh. And what is this offer? That Ketan will repay the Rs 130 crores over five years, without interest, with a one-and-half year moratorium on repayment and no security offered against repayment. Will he raise the money by playing the market and ramping prices again? Nobody knows. In fact the entire offer could well be a gimmick to signal to the market that he is on course to settling his problems. The fact are that Ketan’s assets have been attached by BOI through a court order, his asset in 1992 have been attached by the Custodian under the 1992 Special Courts Act, and nobody knows the implication of that order.
What is the moral of this story? That in the strange Indian system, a consistent performer like BOI headed by a no-nonsense chairman ends up censured, while an outright scamster can find plenty of champions among netas and the babus.