The Hindu Business Line : Alarm bells ring for India

It does not speak well of the transparency and accountability expected of those concerned about the health of India’s financial sector that the Indian public first came to know of the ICICI Bank’s phenomenal (though as yet notional) loss of Rs 1,050 crore ($264 million) in 2007-08 on account of exposure to overseas credit derivatives and investments in fixed income assets not from the Bank itself or the regulators but from a written reply given in Rajya Sabha o n March 4 by the Minister of State for Finance, Mr Pawan Kumar Bansal.

But for some reporter’s alertness in spotting it buried amidst a hundred or more such written replies given daily in both Houses, and making it common knowledge, the depressing fact might well have gone unnoticed, at least for the time being. The public is entitled to know whether the Securities and Exchange Board of India (SEBI) or the Reserve Bank of India (RBI) had inquired into the choice of securities and the reasons for the investment turning sour to rule out the possibility of carelessness or collusion.

It would be remembered that the management of the same Bank had, in 2001, to write off Rs 70 crore resulting from the default of two Calcutta Stock Exchange members, Messrs. D. K. Singhania and A. P. Singhania, and different entities affiliated with them.

At that time too, the Bank clammed up so that the investing public were denied any explanation from either the Bank or the regulators as to the background and justifiability of the exposure, the kind of verification made of the nature of the CSE operations by the brokers and the nature of the watch kept to ensure that the Bank did not burn its fingers.

Following publication of the news of the current debacle, there are reports of the dismal prospect of more bad news coming out in respect of the global businesses of other Banks also in course of time.

The best advice I can give to the banks, the regulators and the Finance Ministry at this stage is not to resort to the well-worn strategy of holding back unpalatable information or giving it out in driblets in the hope that the shock of disclosure of the earlier instalment would have dissipated by the time of announcement of the subsequent instalment.

Cementing factors

The wisest course is to place all the bad news there is in the public domain once and for all in a straightforward and honest manner, along with an account of the precautions taken vouching for the prudence and propriety of the transactions.

Trust and confidence are the most vital cementing factors in the financial sector, and the investing public will be more than willing to make allowances for genuine errors of judgment if only the truth is told to them at the earliest opportunity without trying to be evasive.

It goes without saying that deregulation, liberalisation and globalisation are not unmixed blessings; in fact, they are multi-edged weapons, especially in matters affecting public funds. It is like playing on the trapeze in a circus without safety nets. How dangerous it can turn out to be is evident from what is happening right now in the US, where a 90-year old investment bank, Bear Stearns, disappeared without trace in four days, leaving the whole of Wall Street in an unprecedented turmoil. Barings Bank and Netbank are still fresh in everyone’s memory. Apparently, the banking fraternity is slow to learn its lessons.

The IMF has already warned that the global financial markets crisis is worsening and risk of contagion is increasing. Utmost vigilance against negligence and malfeasance needs to be exercised by the Government to avert a similar situation in India.

B. S. RAGHAVAN

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