Everybody loots the financial system

I am attaching herewith a summary of the Inspection Report of the State Bank of India, Local Head Office N E Circle. This is by no means an exception and can be taken as very typical of what we are informed and what we discuss in the Eastern Board, without being in a position to take effective action.

The members of the Eastern Board have suggested to me that I take it up strongly with the RBI headquarters, that more effective action from the RBI is essential, if this sadly deteriorating trend is to be arrested and reversed. I must admit that it is a very frustrating experience at these Eastern Board meetings, to discuss such reports with the clear knowledge that we are totally ineffective in bringing about a change in these matters.

I hope the RBI will be able to evolve a procedure, whereby the operation of the Banks which it surveys, and to a certain extent controls, are improved.

With best wishes & personal regards

Sd/-".

These are not comments from pesky journalists. They reflect the opinion of the Eastern Board of the Reserve Bank itself. The letter is significant for several reasons. Only a week ago the leak of an inspection report on ICICI caused waves in financial circles. At that time, an anonymous RBI source was quoted by a newspaper as saying that ICICI’s explanations for the many discrepancies pointed out in the report were found "acceptable" by the RBI. Irani’s letter indicates that the RBI may find banks explanations acceptable, but its independent Boards also find its inaction "extremely frustrating".

Also, at least two loss making banks — United Commercial Bank and United Bank of India — which have been repeatedly bailed out (by Rs 6,740 crore at last count) by the Government are headquartered in the eastern region. Finance Minister Yashwant Sinha has, in his budget speech this year, made a virtue of the fact that he will not close down these banks and notoriously loss-making Indian Bank. Further, he promises to consider another bailout if they present a credible revival plan.

The occasional leak of Reserve Bank inspection reports to the press have always served to confirm that the RBI’s supervision machinery is completely ineffectual and that it fails to act on its own findings.

Even during 1992, the large scale clean up which happened after the Securities scam revealed that a senior RBI supervisor, Augestine Kurias had, as far back as in 1986 documented in detail massive malpractice in bill-discounting and other gilt-edged securities transactions. Nobody in the central bank has ever been held accountable for having buried those reports without effective action. In fact, the RBI spokesperson has the audacity to tell journalism students that they knew all about the scam and in fact released details to the press.

In the mid nineties, news of Indian Bank’s massive losses hit newspapers only after the banks’ networth was entirely wiped out. The subsequent revelations showed that the RBI was fully aware of Indian Bank’s dangerously bad financial situation, but allowed its chairman to remain in place with several extensions. One RBI Governor has the dubious credit of restoring the Chairman’s powers to make financial decisions, which had been clipped by his predecessor.

Without questioning the RBI for its supervisory failure, the then Finance Minister P Chidambaram dished out a Rs 1750 crore bailout. Less then three years later, when the RBI should have been watching it like a hawk, Indian Bank had repeated the feat — it wiped out its networth again and in the single year of fiscal 1999 had doubled losses to Rs 788 crore. This can only have happened because the RBI did not force a change it to change its reporting practices.

Circa 1998 — and nothing has changed. The government continues to bleat about divestment and makes plans to dump nationalised bank shares on a gullible public. It whines about the ballooning fiscal deficit and gets ready to hand out another Rs 2,000 odd crore to the three sick banks. This is on top of the Rs 4,800 crore given to Unit Trust of India just a year earlier.

Inspection reports which are early warning signals are still churned out by RBI inspectors and not acted upon. Here is another example. In July 1998, S Gurumurthy, Executive Director of the RBI wrote to Sharda Singh, the chairman of United Commercial Bank expressing "concern" that an inspection had revealed "all-round deterioration in the functioning of the bank". It said, "Erosion in value of assets had partially affected bank’s deposits, besides wiping out its provisions, reserves and paid-up capital entirely". The bank, is pointed out was not maintaining the minimum capital required for holding a banking licence. It revealed wrong recognition of income (NPAs were understated to the extent of Rs 117.75 crore), an increase in operating expenses and deterioration in net interest margin. Even the computation of risk weighted assets was inaccurate.

Among several other things, the letter said that there was no attempt to check Non-Performing Assets (NPAs) or to improve recoveries. The system of checks and controls exercised by regional offices/ zonal offices and the head office over discretionary sanctions was not effective.

Yet, in the Year 2000, its business as usual at UCO bank. Its banking licence is not cancelled and there is no sign of a credible restructuring proposal. Yashwant Sinha made some tough noises but is all set to cave in. After all, it is easier to dish out more money from the exchequer than force corporate houses, who fund politicians, to pay up their dues. It also explains why the central bank rarely feels under pressure for inadequate supervision.

It is only in India that the government can dare to make such an issue of subsidies to the public distribution system, when tens of thousand crores of rupees are forked out regularly to save inefficient and loss-making financial institutions. This happens because the entire political spectrum loots the financial system.

Author’s email: suchetadalal@yahoo.com