Death of a bank: The complete saga

In August 2000, Satara, a sleepy district town on the Mumbai-Bangalore highway, 270 km from the country's commercial capital Mumbai, woke from its slumber. Two rival groups were camping there, distributing proxy forms in a no-holds-barred campaign.

No, it wasn't election time in Satara. Nor was the chairman's post at the local municipal corporation up for grabs. In the eye of the storm was the old private sector United Western Bank set up in 1936 by a middle class lawyer and social worker.

Sicom, a wholly-owned subsidiary of the Maharashtra government and the Makharias of the Emtex group, which together held close to 24 per cent in the bank, wanted four representatives on its board.

On the other side of the fence were nine professional directors. The banker-chartered accountant-company secretary-industrialist-doctor-advocate combine on the board took a vow not to buckle under the pressure of the minority shareholders.

Three resolutions at an extraordinary general meeting at Satara's Kanishka Hall on August 7 -- doubling the authorised capital of the bank from Rs 50 crore (Rs 500 million) to Rs 100 crore (Rs 1 billion), a 1:5 bonus issue, and capitalisation of reserves -- were passed but the management could not push through the proposed 1:2 rights issue.

Armed with proxy forms, the representatives of Sicom and a few industrialists put up stiff resistance. The management did not dare to put the resolution to vote and simply withdrew it. A parallel meeting was held at Monarch Hotel by agitated shareholders and a decision was taken to move the Company Law Board.

These meetings sowed the seeds of the collapse of United Western which was put under moratorium by the Reserve Bank of India on September 2, freezing all normal banking activities barring withdrawal of deposits up to a limit. This week the Reserve Bank announced its intention to hand over the troubled United Western Bank to the Industrial Development Bank of India.

It is ironic that three years before the infighting broke out, the Reserve Bank had been in favour of United Western taking the leadership in banking consolidation in western India.

In August 1997, the Reserve Bank's executive director, G Muniappan, called United Western Bank's CEO, P N Joshi, and two directors each from Ganesh Bank of Kurundwad, Sangli Bank and Ratnakar Bank to explore the possibility of merging all three with United Western.

The idea was to have one bank in three contiguous districts -- Satara, Kolhapur and Sangli -- within a 100 km radius in western Maharashtra. Joshi was willing to take the lead; he even dreamt of merging Sicom with itself and making a United Western Bank of Maharashtra.

The proposal died a premature death as the three boards were not comfortable with the idea of losing their identities. Nobody imagined at that time that United Western would come to such a pass.

A fight for a controlling stake is hardly news among old private sector banks. With their low capital base, they offer easy pickings. The Bangurs and the Tayals fought tooth and nail for the Bank of Rajasthan with the Tayals walking off with the prize.

Takeover tycoon Rajarathinam made an abortive attempt to gobble up the Benaras State Bank, and both Tamilnadu Mercantile Bank as well as Catholic Syrian Bank were targeted by non-resident Indians. Even Sangli Bank, United Western Bank's close neighbour, was once targeted by the Mittals of Kolkata. In fact, the directors of the bank purchased the Mittals' stake to ward off the takeover bid.

However, none of these skirmishes was as intense and as long as United Western Bank's. Ashvin Parekh of Ernst & Young blames "litigating shareholders" for the fate of the bank. He was the advisor to the Bangalore-based Canara Bank which made an unsuccessful bid for United Western.

United Western was possibly the first old private bank to apply for an initial public float in 1994, the year the State Bank of India tapped the capital market. With its assets growing, it wanted to infuse more capital through a rights issue when the infighting came to the fore.

Till then, nobody in the bank even knew how much stake the Makharias held in the bank. Even now, the Bombay Stock Exchange record features only two Makharias who own more than 1 per cent of total shares -- Rekha Makharia (1.68 per cent) and Maliram Makharia Finstock Pvt Ltd (1.39 per cent).

When the Makharias and Sicom staked a claim to four seats on the board on the strength of the almost 24 per cent stake held by them (about 14.5 per cent by the Makharias and their associates and the rest by Sicom), the bank retaliated by filing a winding up petition in Bombay High Court against the Makharia-owned Emtex Industries for defaulting on loan repayment.

It was, however, willing to concede the demand of the state industrial finance agency with which it had a strategic alliance. The bank also sought the Reserve Bank of India's intervention to freeze the voting rights of the Makharia group as it did not seek the regulator's approval for holding more than 5 per cent share of the bank.

Under the norms of the Banking Regulation Act, any entity holding over 5 per cent in a bank must seek the Reserve Bank's approval.

Finally, the board also decided to offer stocks to the employees to fight the takeover threat. It extended over Rs 12 crore (Rs 120 million) by way of loan to the the bank's employees equity trust to purchase about 24.32 lakh shares, representing 8.41 per cent of the bank's capital, from the secondary market.

"The war continued for two years till end 2002 when the bank signed a memorandum of understanding with the Makharia group accepting its demand to appoint two directors. With this, the Makharias, Sicom and the employees trust ended up having two directors each on the board," says a bank insider.

That drew the curtains on the pitched battles at the Company Law Board, the high courts and the board room of the bank, but it was too late to undo the damage done by the series of litigations.

United Western could no longer get its act together. Its expenses rose with the rising wage cost and increasing demands of its 3,000-plus employees affiliated to the Bharatiya Mazdoor Sangh. Business continued to suffer. That led to losses in 2005, 2006 and the first quarter of 2007 and a steady erosion in capital and reserves.

P N Joshi, who had been at the helm of affairs for 10 years (between 1991 and October 2000) blames the "indifferent board of directors and incapable leadership" for the downfall of the bank. "The rights issue was planned in 2000 to infuse capital but it could happen only in 2005. Still the bank could not be saved," says an emotional Joshi.

Satish Marathe, who was made CEO of the bank in December 2002 and saw it through the troubled times till July this year when he resigned, refuses to accept the blame.

Marathe, known for his RSS connections (he was the all India treasurer of the Akhil Bharatiya Vidyarthi Parishad in the 1970s and spent 14 months in jail under MISA), says politics never played a role in the bank. "I don't accept that the bank has failed. We have consolidated... We did not have the capital but if we were given more time we would have raised it," he says.

According to him, rising bond yield made a dent in the bank's treasury income. This, coupled with higher wage cost and the introduction of graded provisioning by the Reserve Bank for sticky assets, affected Western United's bottomline. "When you don't have capital, you cannot grow assets, so how will you generate income?" asks Marathe.

Indirectly, he blames the Reserve Bank of India for rejecting a proposal of capital infusion by a group of investors led by investment banker Udayan Bose.

The bank board submitted the proposal in January. A few Pune-based industrialists were part of the team but at least two of them backed out later. This could be one of the reasons behind the Reserve Bank's rejection of the proposal.

There was another proposal from entrepreneur and politician Vijay Kalantri for acquiring 35 per cent stake in the bank for Rs 200 crore (Rs 2 billion). Kalantri spearheaded the bid through his business entities under the Balaji group banner but the United Western Bank board did not take it up with the Reserve Bank of India.

Joshi also blames the regulator for being "insensitive" to smaller banks. "It wants only larger banks. Otherwise how would you explain its demand of Rs 300 crore (Rs 3 billion) net worth from Ganesh Bank of Kurundwad which had a deposit base of Rs 217 crore (Rs 2.17 billion). It has been holding monthly meetings on United Western for so many years. What did it finally do? You don't kill somebody who has gangrene in one limb -- you can always amputate the limb," says the former CEO of United Western Bank.

Anand Sinha, executive director of the Reserve Bank, defends its decision saying the bank was placed under monthly monitoring from June 2001 on account of its poor financials and especially high non-performing assets.

The central bank issued 13 directions on January 27, 2003, relating to maintenance of capital adequacy ratio, reduction of high cost deposits, reduction of non-performing assets, restriction on opening of branches and so on.

According to Sinha, the Reserve Bank repeatedly advised United Western Bank to take steps to pump in fresh capital but it was unable to come up with any credible plan.

Under the Reserve Bank norms it must have 9 per cent capital adequacy ratio but after posting a net loss of Rs 6.08 crore (Rs 60.8 million) for the quarter ended June 30 this year, the bank's capital adequacy ratio turned negative to -- 0.3 per cent.

The Reserve Bank issued the final warning on January 9 and a meeting was held on January 19 where the Udayan Bose proposal was rejected.

United Western's failure to find a partner for capital infusion conforming to the Reserve Bank's 'fit and proper' promoter criterion put the last nail on the coffin of United Western.

However, those who have been keeping a close watch on the bank say United Western's funeral pyre was lit on August 7, 2000. Its pall-bearers? The rival factions of shareholders who held separate meetings at the Kanishka and Lotus halls at Satara. . .