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Journalism of Courage
MUMBAI, May 19: It is now abundantly clear that regulatory authorities have shown laxity in monitoring the operations of finance companies. The Reserve Bank of India (RBI), the regulator of finance companies, failed in plugging the loopholes thereby allowing the CRB bubble to burst. This is not the first time the central bank has shown lapses in its role. It was caught napping in the Indian Bank episode, urea scam, securities scam, stockinvest misuse and so on.
The CRB affair was going on for the last two years. The company was at fault on several counts: failure in maintaining the statutory requirement with the RBI, payment of unofficial commissions while raising deposits and several lapses in the balance sheet. On the other hand, the CRB group also violated the norms laid down by the Securities and Exchange Board of India (SEBI) by routing the business of its mutual fund through the group’s stock-broking firm. In fact, SEBI prevented the CRB Mutual Fund from coming out with fresh schemes before cleaning up the books.
At a time when these lapses were noticed, the CRB group got an `in principle’ approval from the central bank two years ago to float a new private sector bank with a capital base of Rs 100 crore. The banking licence to CRB group raised many eyebrows as the applications of many other established well-run industrial groups were put in the cold-storage by the RBI on the pretext that industrial groups may divert bank funds to finance their own manufacturing activities. The Aditya Birla group, in fact, sent a letter to the finance minister protesting against the RBI move to give banking licence only to finance companies.
According to RBI sources, when the RBI gave the `in principle’ banking licence to CRB, the RBI inspectors failed to detect the flaws in the CRB balance sheet. “The CRB way of deploying funds violated the norms, but the company was not pulled up for that. The RBI action came only last month.
It’s like shutting the stable doors after the horses have fled,” said an RBI source. However, when contacted, the RBI spokesperson was not available for comments.
A series of scams in the last five years had revealed that the RBI woke up only in the last minute after the damage was done. After the surfacing of the securities scam in 1992, the RBI set up a separate department of supervision (DoS) on December 22, 1993 with the objective of strengthening surveillance mechanism. The RBI also set up the board for financial supervision (BFS) and the advisory council to further sharpen the supervisory mechanism. The fact is that several scams followed.
* Ten top banks, including three major ones had given bridge loans after they were banned by the RBI in the light of the MS Shoes scandal. DoS regularised such loans.
* In the Rs 133-crore urea scam, the RBI knew about the foreign exchange sanction (by the State Bank of India to National Fertilisers Ltd) but no action was taken. RBI looked the other way when SBI allowed the foreign exchange remittances without getting adequate insurance cover.
* RBI investigated the stockinvest scheme which was misused by several banks and promoters. Several companies, including a leading Mumbai-based pharmaceutical company, used stockinvests to artificially subscribe public issues. Not much action has been taken on the report prepared by DoS.
* When Indian Bank ran up a loss of over Rs 1,300 crore last year, the RBI was a silent spectator. Had the nominee directors from the RBI been alert, they could have averted the crisis.
These are only major cases. There is a scam behind each of the 4,000 defaulting commercial bank accounts where over Rs 40,000 crore of bank money is locked up as non-performing assets (NPAs). As an RBI official told The Indian Express some months ago, “RBI has at least one inspection report indicting almost all the banks — government, private and foreign — but they are gathering dust in RBI vaults.”
The fact that the RBI was forced to cancel CRB’s banking licence itself shows that there was something wrong with the RBI’s assessment about the CRB group’s books and accounts. There are over 40,000 companies (including satellite investment firms belonging to major companies) in India. Out of this only 745 are registered with the RBI. “The new RBI Amendment Act will empower the RBI with more powers to monitor finance companies. As per this, finance companies should register with RBI, they should have a networth of Rs 25 lakh and they should be a public/private limited company,” according to Mahesh Thakkar, executive director, Association of Leasing and Financial Services Companies.
A shakeout is now expected in the financial services sector. This will be another test case for the DoS which has been advocating off-site supervision (checking books of accounts and operations) of finance companies and banks. It is to be seen how far these measures will succeed .
