The Hindu Business Line : Moratorium is `a pre-emptive action' of the RBI

Ever since September began, UWB or United Western Bank Ltd has been in the news. We have been reading about the fast developments that followed the imposition of moratorium on UWB. Such as, customers anxiously queuing up to withdraw, and more than a dozen banks lining up as ready grooms in a hurry to tie the knot and husband a morphed UWB into the future.

`Canara Bank, Sicom-Gom-HDFC emerge as frontrunners for UWB,' reads a headline on www.zeenews.com, `50 minutes ago'. Meanwhile, there are voices that the bank's Marathi ethos should be retained, and that professionals should be hired to run UWB. `NYC-Area Nursing Homes to Get UWB RFID Systems,' reports www.rfidjournal.com in an article dated September 11, but the story is about ultra-wideband technology, please note, and not the bank in question.

"Early UWB systems were developed mainly as military surveillance tools because they could `see through' trees and beneath ground surfaces," explains Beth Bacheldor in the article. "Today, there are numerous UWB devices and applications, including those for ground-penetrating radar and medical imaging; vehicular collision-avoidance systems; and communications and measurements." Bacheldor talks about hospitals wishing `to track assets and patients' using UWB and RFID (radio frequency identification) tags.

The big picture

We may possibly need similarly sophisticated surveillance tools to know which bank would come under the sledgehammer of restrictions, as it happened to UWB. A more immediate problem for most people is to `see through' the trees of news developments and decipher the woods, that is, the big picture about the bank, UWB, headquartered at Satara, Maharashtra.

Let's begin our zero base expedition with a visit to www.uwbankindia.com, the bank's site. A photo of W.G. (Waman Ganesh) `Annasaheb' Chirmule greets us in a page about `Origin'. One learns that he had worked for the cause of `Swadeshi' movement. Chirmule founded the Satara Swadeshi Commercial Bank Ltd in 1907, and spurred by its success, established UWB about seven decades ago. The bank commenced operations on March 8, 1937. Right now, though, the situation is too fuzzy to predict who will be controlling UWB's operations in March 2007.

Interestingly, you can find Chirmule on http://pmindia.nic.in. "Year 2000: Conferred Annasaheb Chirmule Award by the Annasaheb Chirmule Trust set up by UWB, Satara, Maharashtra," reads a line in Dr Manmohan Singh's curriculum vitae, immediately after `academic record'. Mergers are not new for the bank. Union Bank of Kolhapur merged into UWB in 1956; and the Satara Swadeshi Commercial Bank Ltd, in 1961.

The UWB founder also established Western India Insurance, `the first insurance company in 1913,' as says http://satara.nic.in in a page devoted to `Prominent Personalities'. The bank's Chairman and CEO Satish Marathe would clarify, on www.indiainfoline.com, that Western India was `one of India's first private sector insurance companies'. He'd add, "Insurance business is in our genes."

Chirumule was popularly known as `Vima Maharshi', presumably for pioneering insurance. On this, V.S. Kulkarni, Zonal Manger of UWB, clarifies over the phone that Vima, or more correctly, WIMA is short for Western India Mutual Assurance, the company formed by Chirmule. "The abbreviation may well be the origin of the present-day word bima or vima, for insurance," he postulates.

The bank has been into insurance business through the Bancassurance route, partnered with New India. A 2005 press release on www.newindia.co.in has interesting statistics about the bank. Such as, `a network of 230 branches spread over 9 States,' `a business mix of over Rs10,000 crore,' as on March 31, 2004', and `a loyal customer base of over 15 lakh.' Pity, there is no insurance against moratorium and attendant disasters that small banks may have to face more frequently these days, as part of a larger shake up happening in the banking industry.

Which is why Marathe's undated `Chairman's Message' on the site sounds ominous. "To say that the banking industry is undergoing transition or change is an understatement," he begins. "The pressures of competition are so high that changes now are not limited to interest rates or the margins only. They go much beyond that — to the extent of even redefining the role of banking and the very way of performing it."

Under moratorium

Redefining of sorts happened on September 2, when the RBI (Reserve Bank of India) announced that UWB was `placed under moratorium' from 2 p.m. on Saturday, and `up to and inclusive of December 1 or an earlier date, if alternate arrangements are put in place'.

What is supposed to happen `during this period'? The RBI said it would "consider various options, including amalgamation of UWB with any other bank and finalise the plans in public interest and with a view to ensuring that the public deposits are protected." The press release on www.rbi.org.in mentions that as on March 31, 2006, UWB's deposits were around Rs 6,500 crore and advances Rs 4,000 crore. In each of the last two years, the bank incurred net losses of about Rs 100 crore.

"Its net non-performing assets (NPA) were 5.66 per cent as on March 31, 2006 as compared to the peer group figure of 1.97 per cent. The bank's assessed Capital to Risk Weighted Asset Ratio (CRAR) turned negative at (-) 0.3 per cent as on June 30, 2006. This has jeopardised depositors' interest. The bank was also unable to come up with any credible plan to raise fresh capital to bring its CRAR to the prescribed level," is more from RBI to justify its action.

"The RBI has set up help lines at Mumbai to assist the members of public," assures the communiqué that was to cause tectonic shifting in the financial world. Only, the press release is silent about how many depositors of UWB are affected by the moratorium, and under what law has the action been taken. One other recent occurrence of the bank on RBI's site is in `Mail Bag' dated April 26, 2005, which acknowledges the inclusion, among others, of UWB Chairman in the mailing list. "I know of nothing more futile than a penal sentence that contributes to nothing but the ridiculous," reads a quote of J. Lindsay Almond, Jr cited on the page. To UWB, the penal sentence has been pronounced, and it may seem futile to explore the Banking Regulation Act, 1949.

Yet, it helps to know that Section 45 in this Act gives the RBI power to apply to the Centre for an order of moratorium for the suspension of business by a banking company, and to prepare scheme of reconstitution of amalgamation, `where it appears to the Reserve Bank that there is good reason so to do.'

What is `good' for one need not be good for another. The expression `good reason' primarily relates to interest of the depositors and the bank, explained the Bombay High Court in the Ganesh Bank, Kurundwad Ltd case.

Moratorium was `a pre-emptive action' of the RBI, considering the financial position of the bank, and to prevent further difficulties, the court had said.

"It is not that when there is a run on the bank then only RBI must intervene or that it must intervene only when there are good number of court proceedings against the concerned bank. The RBI has to take into account the totality of the circumstances and has to form its opinion accordingly," reads the text of the apex court verdict in the Ganesh Bank case, dated August 28. "When a moratorium is imposed, the RBI was duty bound to prepare a scheme either of reconstruction or of amalgamation under Section 45(4) with any other banking institution," pointed out the court. As you may remember, Ganesh's amalgamation happened with Federal Bank, in what was described as a `cut and paste scheme'.

Federal wasn't the only suitor. As now happening with UWB, there were multiple offers for Ganesh too. For instance, Citi Bank and Standard Chartered Bank had expressed their interest, but these were `neither comprehensive nor unconditional, being both dependent upon a request for due diligence and in certain instances regulatory forbearances,' opined the RBI. "Ratnakar Bank's offer was not accepted as it was itself an ailing bank," noted the court. And Saraswat Bank's offer was rejected because it was a multi-State co-operative bank, governed by Multi State Cooperative Societies Act, 2002.

Returning to UWB's site, which sports the `Affectionate people!' signature below the bank name, it is perhaps prophetic that the `Strong Fundamentals' option in the `Company Profile' brings up a simple message: `Under Construction'. Unfolding news is that the RBI has asked IDBI to take over UWB.

ZeroBase@TheHindu.co.in

D. Murali

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