Sucheta Dalal :The Politics Of Banking And Its Supervision
Sucheta Dalal

Click here for FREE MEMBERSHIP to Moneylife Foundation which entitles you to:
• Access to information on investment issues

• Invitations to attend free workshops on financial literacy
• Grievance redressal


You are here: Home » Column Topics » Financial Express » The Politics Of Banking And Its Supervision
                       Previous           Next

The Politics Of Banking And Its Supervision  

Aug 16, 2004


Corporate Couriers Limited, a company listed on several stock exchanges, was suspended in April 2003 for failure to submit to report financial data since the end of December 2002. T Raghavan Sarathy heads the company.


In August 2004, there is a run on the South Indian Cooperative Bank and the Reserve Bank of India (RBI) placed restrictions on withdrawal of over Rs 1,000 each. The same Mr Sarathy, an office bearer of the Maharashtra Pradesh Congress Committee (MPCC) is the chairman of the bank.


This raises two questions. Shouldn’t the head of a bank be a person whose companies have no regulatory lapses? And, would Mr Sarathy have continued to head the bank but for his political connections?


There are dozens of examples where persons with questionable track record or clear political affiliations are heading and controlling sensitive financial organisations, especially co-operative banks. Recently, a politician who was all set to expose indiscriminate loans to politician friends of the management and suspected election funding, was persuaded to desist by threatening retaliatory exposures. He dutifully remained silent.


The political conspiracy to ensure dual supervision of co-operative banks in order to perpetuate the control of politicians is nothing new. The victims are small depositors who are ignorant of the difference between a nationalised and co-operative bank or are lured by locational advantages or the slightly higher interest rate that they offer. But the politicisation of bank supervision is not restricted to co-operative banks. There are plenty of other examples.


The Reserve Bank of India (RBI) website would show that persons listed as wilful defaulters have been appointed as government nominee directors on nationalised banks.


There are dozens of examples where persons with questionable track record or clear political affiliations are heading and controlling sensitive financial organisations, especially co-op banks


The RBI inspection report of 1999-2000 raised grave questions about the quality of Statutory Audit in Global Trust Bank (GTB) leading to a change in auditors. But the same suspect auditor is a government nominee director on the Deposit Credit Insurance Guarantee Corporation (DCIGC), which is packed with senior RBI officials.


A regulator tells me about how several MPs, who were part of the Joint Parliamentary Committee (JPC), demanded to know why Ramesh Gelli’s companies were kept under suspension. The system does not allow the regulator to go public about these subtle threats nor does it punish politicians for their pressure tactics on behalf of dubious entities and individuals.


These are problems with no easy solutions. Can one demand investigation and punishment of wrong-doers when there is always a political hand in major financial scandals? Look at how Unit Trust of India’s (UTI) former chairman is literally untouched despite the phenomenal losses and a massive government bailout.


Similarly, can regulators be shielded from political interference when their appointments are usually politically determined?


If none of this can be changed overnight, can’t we at least work at reducing depositor panic and by controlling what is outside the domain of political influence?


For instance, how about ensuring better communication and sharing of information between regulators? The need to share data is gaining increasing urgency as more banks and insurance companies are traded on stock exchanges or diversifying into business that could bring the capital market to a halt.


For instance, when GTB was suddenly placed under moratorium, the bigger panic was among stockbrokers and investors. The bank was a Depository Participant (DP) and had custody of the entire share portfolio of thousands of investors. These had nothing to do with banking operations and the bank had no right over them.


Similarly, it was a clearing bank for stock exchanges and its sudden stoppage of business could have caused disruption in the settlement business. It was also a big financier of brokers through bank guarantees or against shares.


When the RBI announced a moratorium on July 24, the biggest panic was triggered among non-depositor users of GTB and the capital market regulator had no clue about what was going on.


The question is, should the moratorium have been handled differently? And should the Securities and Exchange Board of India (SEBI) been taken into confidence? Clearly, SEBI is irked at being kept in the dark, but the finance ministry believes in information-sharing on a need-to-know basis. Still, there was time enough to take investors into confidence on Sunday, before the banks next working day.


We need to discuss this issue more openly. It must also be made clear to bank customers and depositors that any future moratorium will always be announced over weekends or with a gap before a working day. Also, all regulators connected with the bank must have immediate access in order to be able to clarify the situation without panic. On July 24, the situation sorted itself over the weekend, but clearly, it is far healthier to ensure that all regulators are briefed to provide a considered response.


Taking care of small depositors is also important. Their panic reaction is fodder for the media and only fuels further hysteria. A surprisingly large number of investors are clueless that amounts up to Rs 1 lakh are safe. They also don’t know that the Deposit Insurance Credit Guarantee Corporation (DICGC) does not deal directly with depositors, but pays either the liquidator or the transferee bank. This fact too needs to be reiterated through the media in times of panic, otherwise, the failure of one bank, could end up having a contagion effect on other banks.


Email: [email protected]

-- Sucheta Dalal