A bank without the buck, a bill without teeth

India borrows ideas that we don’t need, like the FRDI Bill, and ignores the ones we need, like rewarding whistle-blowers such as the ones who want to save Bombay Mercantile Bank, says Debashis Basu.

Illustration: Uttam Ghosh/Rediff.com

The biggest farce in the real life application of the Financial Resolution and Deposit Insurance Bill is: It would not apply to the only segment that needs “resolution” and “deposit insurance” -- the cooperative banks.

These banks, barring a few exceptions, are controlled by politicians, and forced to lend money to fraudulent projects and go belly up at the rate of one a month.

But no regulatory official has lost his job and no politician has gone to jail.

Did we need a Financial Regulation and Deposit Insurance (FRDI) Bill, which pretends to ignore this reality?

Rather, we need to regulate cooperative banks like other scheduled banks.

But this is typical of Bills, like the FRDI Bill, which are drafted in India and how politicians implement them.

It is bad enough that most cooperative banks are run by shady politicians and go bust.

But what would you say about a case where investors, employees, and shareholders of a bank are blowing the whistle on malpractices for decades, braving victimisation and threats, but nobody would listen?

That is the story of Bombay Mercantile Bank (BMCB), one of the oldest, multi-state minority cooperative banks, which has been robbed and mismanaged at least since the mid-'90s.

Only the efforts of a few whistleblowing former employees have kept the bank from going bankrupt.

Here is a small sample of the many charges the whistleblowers have slapped, backed by documents:

A Rs 540-million bank guarantee given against six allegedly fake FD receipts of Rs 90 million each;

Loans sanctioned to those close to the directors have gone bad;

Evergreening of bad loans by sanctioning fresh loans without security or fake documents;

Sanction of loans by the managing director, without the board’s permission, far in excess of his power;

Investment of Employees Provident Fund money in unlisted companies, violating PF norms;

Illegal transfer of tenancy rights of the bank properties;

No provision for gratuity and leave fare concessions in the balance sheet in some years, in order to show cash profits;

Bogus loans sanctioned against fake documents. These loans were then transferred to nationalised banks and later classified as non-performing.

The RBI and Registrar of Cooperative Society are fully aware of what is going on.

More than a decade ago, with the RBI’s intervention, a former secretary to the Government of India was appointed chairman, but mismanagement continued.

Under the RBI’s instructions, R M Khan, a retired district judge, investigated various charges and presented a report to the board.

The report confirmed mismanagement. In January 2016, the RBI put in place a new management, which was determined to clean up things.

But in a board meeting held on May 16, 2016, a new chairman and managing director were appointed -- the same directors who had been disqualified by the RBI and Central Registrar of Cooperative Societies (CRCS).

Punjab National Bank and Canara Bank have filed criminal complaints against the two and another director of the bank, for criminal conspiracy, cheating and criminal misconduct.

Although the RBI has imposed stringent conditions on the bank’s operations in November 2015 and stopped it from sanctioning fresh loans, whistleblowers allege that the management is alienating assets and weakening the bank.

In June last year, after a lot of goading and pushing, the RBI wrote to the CRCS, confirming that many of the dubious transactions were true, the continued functioning of the chairman was detrimental to the bank, and the CRCS should take action.

However, when CRCS joint secretary Ashish Kumar Bhutani issued a show-cause notice to the chairman and the bank’s managing director, it was too insipid to be of any impact.

BMCB continues to function the same way.

Since both the RBI and Registrar of Cooperative Societies are dragging their feet, the frustrated whistleblowers filed a PIL (public interest litigation) petition in the Bombay high court.

Among their allegations, bad loans worth Rs 2 billion have been sold off to an asset reconstruction company to wipe out a series of crooked transactions; and there have been violation of rules and regulation in the appointment of the bank's managing director.

The petitioner got threats from a dreaded gangster, asking him to stay off the bank.

In October last year, the court issued a notice to the RBI and CRCS, seeking their response.

The CRCS washed its hands off, saying that it was up to the bank’s board to act.

So, who would be held responsible for BMCB’s continued mismanagement if the CRCS has no powers? Only the RBI.

But if the FRDI Bill is passed, how will a case like this be handled? By asking innocent creditors to bail in!

After the financial crisis of 2008, along with new laws like the FRDI, Western governments have made whistleblowers an important source of information, rewarding them with 10 per cent of fines and penalties.

It is commonsensical to prevent an impending crisis rather than have a law for resolution, after the event.

But India borrows ideas that we don’t need, like the FRDI, and ignores the ones we need, like rewarding whistleblowers such as the ones who want to save BMCB. What a shame!

Debashis Basu is the editor of www.moneylife.in.