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Journalism of Courage
Indian banks aren8217;t solid, says UK agency
The Financial Services Authority FSA of the UK, after an assessment of several Indian banks with branches in that country has warned that many of the banks do not currently meet with the FSA8217;s authorisation criteria under the UK Banking Act of 1987. Based on the assessment a review committee is to decide whether the UK branches of these banks would be allowed to continue operations.
As usual non-performing assets is a concern. The FSA says that the obligation tolend 40 per cent of its advances to the priority sector has increased the risk of non performing assets NPAs. Moreover the quality of assets is sensitive to domestic economic shocks because its asset portfolio is concentrated in the Indian economy.
BoB has no clear whole-bank strategy to deal with increasing domestic competition, this would make it difficult to sustain current earnings. The FSA puts the business risk and control risk of bank of India at medium, but it is worried that overstaffing of public sector banks and increased competition would erode earnings due to the loss in market share. It is also concerned that powerful trade unions and government restrictions have badly limited the bank8217;s ability to cut staff costs.
In BoB8217;s case, it says that the 65 per cent growth in gross profits in 1997-98 were in part due to revaluation of investments, which had appreciated due to low interest rates. This situation could well reverse when interest rates began to rise. A key issue raised by the FSA isthat Indian legislation designed to curb money laundering does not meet the standards set by the Vienna convention. So much for the draconian FERA that has terrorised businessmen for years. The FSA believes that the new FEMA, would in fact meet Vienna convention standards but it has been delayed.
The current confidentiality laws in India, it says, prevent banks from probing the source of funds for suspicious transactions. It fears that Indian banks could end up as conduits for laundered funds to enter UK and other financial systems.
The FSA has good reason to be concerned, but the concern should extend to British banks8217; Indian operations too. In 1992-93, the Indian enforcement authorities traced the brazen use of vostro accounts of several banks including Standard Chartered, ANZ Grindlays and several Indian banks to transfer money abroad. The funds transferred, through an organised racket with possible political links ran into crores of rupees. The enforcement directorate had collected documentaryevidence with which to proceed against the guilty. However, the investigation is in limbo for over five years.
Coming back to the FSA8217;s findings, its other serious concern is regarding Y2K compliance. BoB, it says, did not begin testing its Y2K compliance until early 1999. This was not only behind RBI guidelines, the bank had not worked out contingency plans for dealing with the fallout of faulty compliance. The FSA has warned that unless its Y2K preparations are thorough and completed within agreed time-frames it could fail to be compliant in time.
The FSA also points out to weak systems of collection and distribution of information. It points out that BoB8217;s international division could not collate information sought well before the FSA visit to India. An inability to gather and communicate information rapidly could lead to flawed decisions and an inability to respond to market developments, warns the FSA. Similarly, it points out that there was no succession planning for key posts. It expressesparticular concern about the London operations where four posts have been lying vacant and there was no replacement appointed for the general manager who was due to retire.
RBI sources insist that Mr.Talwar who returned from the UK on Thursday has been able to sort out all issues raised by the FSA. However some, such as unions, succession and Y2K compliance are beyond the RBI8217;s ability to make promises. In fact, the FSA8217;s assessment is not an examination or an audit, it is merely a high level review. As such, there are several other concerns that will remain out of the purview of its examination 8212; this includes the increasing risk to bank portfolios through subscription to private placement issues of state undertakings and public sector institutions and several notorious private sector groups. Yet the fact that a foreign regulatory authority has questioned the adequacy of the systems and compliance of Indian banks has increased the pressure on the RBI to beef up its scrutiny. It would cause considerableembarrassment to the RBI if the FSA indeed withdraws the authorisation for any of the Indian banks to operate in the UK and forces a closure.
Author8217;s e-mail:suchetadalalyahoo.com
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