Clean Up Process Begins In United Bank

The clean-up process in United Bank-Hindu Business Line

The Kolkata-based government-owned United Bank of India (UBI) has been in the news for all the wrong reasons. The latest and arguably the most damaging piece of news till now has been the exit of its Chairperson and Managing Director Archana Bhargava. After a brief stint of less than a year at the helm of the bank, Ms. Bhargava called it a day, citing health reasons. Her term was to end in February, 2015.

Apart from a terse announcement by the government that her request for voluntary retirement has been accepted, nothing much is known as to what prompted her to take this step, leaving the bank headless at a time when it requires some robust leadership.

Ms. Bhargava’s side of the story will most probably be never known, even if she had left after ‘turning around’ the bank.

It is not just because that the problems at UBI appear to be too complex to be resolved by a single individual however adept she is, and has the full government support. The reason why Ms. Bhargava may not record her story is simply this. For very valid reasons, public sector executives, especially bankers, see a virtue in remaining in the background. Too much publicity — turning the spotlight on one self — has been counter-productive.

Besides, Ms. Bhargava will be remembered as one who started the cleaning up process in UBI. Rescuing a bank is much less glamorous than expanding its balance sheets.

The process started by her would eventually lead to fixing responsibility on whose remit the bank allegedly fudged accounts or deliberately misstated the financial position. It will not be easy for a CMD to function in a normal manner, when her entire team of senior management faces one inquiry or another, which will inevitably follow.

Media reports talked of a rift between Ms. Bhargava and senior officials of UBI handling the credit portfolio. But based on the bank’s deteriorating financial health and the charge that senior UBI officers did not disclose the extent of decline as mandated by prudent accounting rules, there is no way a new CMD could have taken any other route except to bring the problems into the open.

The financial statements of the bank for the December quarter are revealing — gross-NPAs surged three times to Rs.8,546 crore from Rs.2,964 crore in March, 2013, and an unprecedented loss of Rs.1,238 crore .

Unflattering financials

Clearly if the official announcement of the unflattering financials took most people by surprise, it is obvious that the descent has been over the years. The basic cause might be some reckless lending culture, which led to bad loans and unacceptably high levels of NPAs. Government influence cannot obviously be ruled out. It is reported that UBI has been the designated nodal agency for many socio-economic programmes in eastern India — nothing wrong in that except that it calls for special skills in supervision and follow up, which it seemingly did not have. Also, in those schemes, there is a much bigger scope of government/politicians influencing the credit decisions.

No single major defaulter — Kingfisher or Deccan Chronicle Holdings Holdings — has emerged although it is not clear whether UBI has a small exposure on these high profile entities.

Large corporate defaults — so common even with much better-run PSBs — would distract attention from what appears to be a collective failure of the UBI’s top management.

The ongoing economic slowdown has been blamed for the proliferation of NPA’s not only in UBI, but also in much bigger and better-run banks such as SBI. All banks have been making larger provisions in the December quarter compared to the earlier period. If the slowdown persists, the stress on their balance sheets will naturally increase.

The core problem

In the UBI’s case, while the full picture will be known after some time, it appears that the core of its problems relates to not classifying a large number of small loans as NPAs. More intriguing is the explanation some other loans were reported as non-performing assets when, in fact, they should not be classified as such.

Certain top officials of UBI have faulted the software, which, according to them, was responsible for the misreporting of loans. Infosys, which has developed this software, has strongly countered the argument, saying that a number of banks have been using it for a long time without a glitch.

The government, as the majority stakeholder, has quite a task on hand not only in getting UBI back on its feet but also in sprucing up all public sector banks’ image, which has received quite a hit recently .

http://www.thehindu.com/business/Industry/the-cleanup-process-in-united-bank/article5740690.ece

Depositors to get up to maximum of Rs 1 lakh if bank goes bust: HC-Times of India

MUMBAI: The Bombay high court has upheld the validity of the Rs1 lakh rule that states that if a bank goes bust, its depositors will get up to a maximum of Rs 1 lakh from the banking insurance system. A division bench comprising Justice Abhay Oka and Justice Mahesh Sonak dismissed petitions filed by a number of credit societies that had deposited over Rs 20 crore in the Vasantdada Shetkari Sahakari Bank, which was ordered to be wound up after the Reserve Bank of India cancelled its banking licence. 

The high court bench pointed out that the scheme was framed to ensure security to small depositors — as of 2009, around 89% of the deposits in the banking system in India were less than Rs 1 lakh. "The purpose of the deposit insurance scheme is to afford some cover to small depositors by providing them with a safety net so that the entirety of their deposits are not wiped out, when the banks in which they are held, go into liquidation," said the judges. "The provisions of the (law), therefore, have to be construed, not in the context of any particular bank or particular fact situation, but rather from the context of protection afforded to numerous small depositors and the entire banking system in the country," they said. 

Under law, all banks in the country are registered with the Deposit Insurance and Credit Guarantee Corporation (DICC). When a bank is ordered to be wound up the insurance indemnity scheme kicks in — all depositors who have deposits of less than Rs 1 lakh are given the exact amount of their deposits, while all depositors who have more than Rs 1 lakh in deposits in that bank get only Rs 1 lakh. The credit societies claimed that the insurance scheme covers the entire amount so the entire money lost by them has to be returned. 

They claimed the provisions of the rules were wrongly interpreted and instead of treating each credit society as one unit, every investor in that credit society should be offered benefit of the insurance scheme. The credit societies also said that the classification was arbitrary and discriminatory as it treats depositors with Rs 1 lakh and less as different from those who have deposits of more than Rs 1 lakh. 

The HC rejected these contentions and also ruled that the classification was justified and valid. It also pointed out that as opposed to a general insurance scheme, banks pay a meagre amount as premium under the scheme. Further, the DIGC cannot decline to offer cover to any bank registered with it. 

The high court bench observed that the level of insurance cover in India works out to 2.2 times the per capita GDP of the country, when, in fact, the international benchmark in this regard is between 1 to 2 times the per capita GDP. 

http://timesofindia.indiatimes.com/city/mumbai/Depositors-to-get-up-to-maximum-of-Rs-1-lakh-if-bank-goes-bust-HC/articleshow/31308750.cms