The Hindu Business Line : An old bank that came under the axe too fast

UWB or United Western Bank is the latest fishbowl, with almost everybody taking a peek at what's up. Sadly, the cynosure of the financial sector is anything but healthy, languishing as it does in intensive care under a moratorium imposed by the Reserve Bank of India. To industry watchers, a case of contextual interest should be Ganesh Bank, Kurundwad Ltd vs The Union of India, decided by the Supreme Court on August 28.

Ganesh Bank was founded in 1920. It had 32 branches in Kolhapur, Sangli and Belgaum. Depositors numbered around 1,75,000. "It was carrying on its activities smoothly, and it incurred losses only once and that was in the financial year 2004-05," as one learns from the text of the apex court judgment. Even the loss was for reasons beyond Ganesh's control: "(i) the value of the Government securities, wherein it had made deposits, went down; and (ii) the provisioning norms set up by the RBI were made more stringent."

Therefore, the bank `was shocked to receive the order of moratorium on the morning of January 8, 2006.' As you may remember, the 3-month moratorium had directed Ganesh not to grant any loan or advances. Stringent controls were clamped on withdrawals, so that depositors could take out their money only `in the event of certain difficulties such as medical treatment, higher education and obligatory expenses like marriage.'

Then, more things happened; and faster, too, than in the case of UWB. The central bank appointed two directors to Ganesh's board, and announced the bank's merger with Federal Bank. Ganesh filed a suit in protest against all these measures.

The Bombay High Court passed an interim order saying that the status quo should be maintained. Aggrieved by the order, the RBI and Federal Bank knocked the doors of the apex court, which ruled on January 30 that the High Court should decide the case early. Back in the High Court, Ganesh argued that the orders for imposing moratorium, and appointing directors were both `mala fide to suit the convenience of Federal Bank, ultra vires the power of the RBI and the Central Government and, therefore, bad in law, illegal and void'. So too, the scheme of amalgamation was `motivated and pre-planned... arrived at without considering the proposals of four other banks which were better placed and had made better offers', pointed out Ganesh.

On the other side, the RBI and Central Government submitted that `the Bank was in serious financial difficulties', and that the decisions were essentially `for benefit of the depositors'. Also, that `the interest of the employees was taken care of and the interest of the shareholders obviously came last.' Of particular interest should be paragraphs 9 to 11 of the judgment, where one reads about the facts that weigh in favour of Ganesh.

Justices Arijit Pasayat and C.K. Thakker of the Supreme Court heard the rival arguments and said that to arrive at a decision on `reasonableness' the court had to find out if the administrator had left out relevant factors or taken into account irrelevant factors.

"To characterise a decision of the administrator as `irrational' the court has to hold, on material, that it is a decision `so outrageous' as to be in total defiance of logic or moral standards," observed the judges. "In essence, the test is to see whether there is any infirmity in the decision making process and not in the decision itself," they said, dismissing Ganesh's case.

A verdict that is worth a detailed study.

ExParte@TheHindu.co.in

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