WHY BANKS FAIL IN INDIA
A bank failure is the closing of an insolvent bank by a BANKING REGULATOR.
The Banking regulator, The RBI, has the power to close national banks falling within its jurisdiction.
Banks fail when they are unable to meet their obligations to depositors and others.
When a bank fails, THE DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION (DICGC) covers the insured portion of a depositor’s balance, including money market accounts.
A bank fails when it can’t meet its financial obligations to creditors and depositors. This could occur because the bank in question has become INSOLVENT, or because it no longer has enough LIQUID ASSETS to fulfill its payment obligations.
When a bank fails, assuming the DICGC insures its deposits and RBI finds a bank to take it over, its customers will likely be able to continue using their accounts, debit cards, and online banking tools.
Bank failures are often difficult to predict until THE PROPOSED BANKING RESOLUTION CORPORATION does take a decision on whether a BANK IS SET TO BE SOLD or HAS TO BE DISSOLVED.
It may take months or years to reclaim uninsured deposits from a failed bank because of THE SLOW STEP BY STEP RESOLUTION PROCESS.
The most common cause of bank failure occurs when the value of THE BANK’S ASSETS FALLS TO BELOW THE MARKET VALUE OF THE BANK’S LIABILITIES, which are the bank’s obligations to creditors and depositors. This might happen because the bank loses too much on its investments. It’s not always possible to predict when a bank will fail.

WHAT HAPPENS WHEN A BANK FAILS?
When a bank fails, it may try to borrow money from other solvent banks in order to pay its depositors. If the failing bank cannot pay its depositors, a bank panic might ensue in which depositors run on the bank in an attempt to get their money back. This can make the situation worse for the failing bank, by shrinking its liquid assets as depositors withdraw cash from the bank. The DICGC, the central government has insured bank deposits up to Rs 5 lakhs in India.
When a bank fails, THE PROPOSED BANKING RESOLUTION CORPORATION (under The proposed FRDI Bill), will take the reins, and will either sell the failed bank to a more solvent bank, or take over the operation of the bank itself.
Ideally, depositors who have money in the failed bank will experience no change in their experience of using the bank; they’ll still have access to their money, and should be able to use their debit cards and checks as normal.
In the event that a failed bank is sold to another bank, account holders automatically become customers of that bank, and may receive new checks and debit cards.
When necessary, the RBI has taken suitable steps on failing banks in India in order to ensure that depositors maintain access to their funds, and prevent a bank panic.

THE LAW IN US
The FDIC was created in 1933 by the Banking Act (often referred to as the Glass-Steagall Act). In the years immediately prior, which marked the beginning of THE GREAT DEPRESSION, one-third of American banks had failed. During the 1920s, before the Black Tuesday crash of 1929, an average of about 70 banks had failed each year nationwide. During the first 10 months of the Great Depression, 744 banks failed, and during 1933 alone, about 4,000 American banks failed. By the time the FDIC was created, American depositors had lost $140 billion due to bank failures, and without federal deposit insurance protecting these deposits, bank customers had no way of getting their money back.
______________________________________
Let me share an anecdote:
My friend Ghanashyam got promoted as a Bank Manager & got a rural posting
A tribal came for a loan of Rs 2L to buy buffaloes & start selling milk
Ghanshyam asked him for collateral security.
The tribal asked what is collateral security?
Ghanshyam explained that a bank needs an equal amount of security in the form of an asset
The tribal asked since the bank will be charging interest, then why collateral?
Ghanshyam, a little annoyed still kept explaining.
The tribal agreed to keep his house as security
The formalities were completed and a loan of Rs. 2.00 lacs was sanctioned at 9% interest repayable in 5 years.
After 6 months, the guy returned to pay off the entire loan amount
Ghanshyam asked him how is his business to which he replied it is going on very well & he could amass a good amount in a short period
Ghanshyam thought of his Deposit target for March & asked what is he doing with the money earned
He replied that he kept it in his house in a locked box.
Ghanshyam was so happy to hear that. He told the Tribal that he can keep the money with the bank & the bank will pay him interest.
Now comes the most interesting part which describes the state of our banks…
The tribal asked, “What Collateral Security will your bank give??”
_________________________________________________
THE STANDING COMMITTEE ON FINANCE (Chair: Dr. M. Veerappa Moily) submitted its report on ‘STRENGTHENING OF THE CREDIT RATING FRAMEWORK IN THE COUNTRY’ on February 13, 2019.
A credit rating agency is a body corporate which is engaged in the business of rating of securities offered through public or rights issue.

KEY OBSERVATIONS AND RECOMMENDATIONS OF THE COMMITTEE INCLUDE:
REGULATORY FRAMEWORK: The Committee noted that credit rating agencies in India have progressed from rating SIMPLE DEBT PRODUCTS to COMPLEX DEBT STRUCTURES, covering a wide range of products and services like SECURITIES, BANK LOANS, COMMERCIAL PAPERS, AND FIXED DEPOSITS.
In India, the Securities and Exchange Board of India (SEBI) primarily regulates credit rating agencies and their functioning. However, certain other regulatory agencies, such as THE RESERVE BANK OF INDIA (RBI), INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY, and PENSION FUND REGULATORY AND DEVELOPMENT AUTHORITY also regulate certain aspects of CREDIT RATING AGENCIES under their respective sectoral jurisdiction.
THE SEBI (CREDIT RATING AGENCIES) REGULATIONS, 1999 provide for a DISCLOSURE-BASED REGULATORY REGIME, where the agencies are required to disclose their
o RATING CRITERIA,
o METHODOLOGY,
o DEFAULT RECOGNITION POLICY, AND
o GUIDELINES ON DEALING WITH CONFLICT OF INTEREST.
The Committee noted that SEBI is among the few regulators globally to mandate public disclosure of rating criteria and methodology by the agencies.
CHANGE IN REGULATIONS: The Committee noted that the rating of an instrument or entity is being increasingly relied upon by capital markets, bankers, and investors and constitutes a key input for financial decision-making.
In the Indian context, the credibility of credit rating has come into question in the crisis involving THE INFRASTRUCTURE LEASING AND FINANCIAL SERVICES LIMITED (IL&FS), a major infrastructure development and finance company of systemic importance, with a debt obligation of Rs 91,000 crore.
The credit rating agencies ignored the rising debt levels at IL&FS, and continued rating it AAA, indicating the highest level of creditworthiness. In this regard, the Committee recommended that the regulators (such as SEBI and RBI) should review their regulations and suitably modify them to ensure greater
o objectivity,
o transparency and
o credibility in
o the whole credit rating framework.
The Committee also recommended that the Ministry of Finance should seek a FACTUAL REPORT FROM THE CONCERNED REGULATORS REGARDING THE ENFORCEMENT OF THE REGULATIONS. In particular, the Ministry should assess the action taken by the regulators against the credit rating agencies who had been giving stable ratings to IL&FS prior to the default crisis.
Further, it suggested that the disclosures being made by credit rating agencies should also include important determinants such as:
(i) extent of promoter support,
(ii) linkages with subsidiaries, and
(iii) liquidity position for meeting near-term payment obligations.
ISSUER PAYS MODEL: Currently, the credit rating agencies follow the ‘issuer pays model’, under which the entity issuing the financial instrument pays the agency upfront to rate the underlying securities.
However, the Committee observed that such a payment arrangement may lead to a ‘conflict of interest’ and could result in compromising the quality of analysis or the objectivity of the ratings assigned by the agencies.
Therefore, it suggested that the Ministry of Finance or the regulators may consider other options as well, such as the ‘investor pays model’ or ‘regulator pays model’ after weighing the relevant pros and cons.
Alternately, within the existing framework, the appropriate rating fee structure, payable by the issuer may be decided by SEBI, in consultation with RBI and the credit rating agencies.
ROTATION OF CREDIT RATING AGENCIES: Under the current framework, there is no provision for the rotation of credit rating agencies.
The Committee recommended that mandatory rotation of rating agencies should be explored.
This would aid in avoiding the negative consequences of long-term associations between the issuer and the credit rating agency.
This is particularly significant considering the recent instances of failure of credit rating agencies identifying trouble in their client-entities.
Further, the Ministry may also provide for ratings to be compulsorily carried out by more than one agency, particularly in respect of debt instruments or bank credit above Rs 100 crore.
Currently, there are only seven credit rating agencies in the country. To increase competition, the Committee recommended that the existing THRESHOLD FOR REGISTRATION OF SUCH AGENCIES MAY ALSO BE SUITABLY LOWERED with a view to encouraging more entities, particularly START-UPS WITH THE REQUISITE CAPABILITY AND EXPERTISE.
IL&FS: The Committee noted that the central government has intervened in the IL&FS crisis and reconstituted the Board (the matter being under National Company Law Tribunal). However, the Committee recommended a comprehensive commission of inquiry into the crisis, which will assess:
(i) the role of credit rating agencies that had overrated the entities, and
(ii) the role of the Life Insurance Corporation of India, the largest institutional stakeholder in IL&FS.
_________________________________________________
We have a host of credit RATING AGENCIES giving advice to corporates and Banks.
CREDIT RATING COMPANIES or more precisely called the CRA are termed as one of the biggest players in THE CREDIT RATING INDUSTRY.
As the name signifies ratings, in simple terms rating the debtors are the task of these companies available across India, THE GOOD RATING IS THE DREAM OF ALL DEBTORS OR WE CAN SAY PEOPLE SEEKING LOANS to achieve their different dreams.
Has THE OBJECTIVITY LOST ITS RELEVANCY in credit rating? Do in THE APPRAISAL OF BUSINESS RISK MATRIX/ FINANCIAL RISK MATRIX OR INDICES OF RISK APPRAISAL and the business intelligence more and more subjectivity has been deliberately injected by corrupt ranks and files of these agencies?
As per THE RULES from the debiting companies and different loan based companies or bank, THESE RATINGS PROVIDED BY CREDIT AGENCIES ARE CRUCIAL.
You must be thinking about the link between CREDIT RATING AND LOANS, the link is simple as none of THE COMPANY WANTS DEBTORS WITH AN IRREGULAR INTEREST PAYMENT.
The debts or loans THE LOAN APPLICANTS took in the past, these CRA have a total record of the payment (interest as well as capital installment) and based on timely payments GOOD CREDIT RATINGS are provided and debtors offer easy loans and debts to regular and timely payers.
There is a different range of debt instruments that decides CRAs, some of the top available options for the same are Government bonds, corporate bonds, CDs, Mortgage-backed securities, etc.
There is scope for improving BUSINESS RISK MATRIX/ FINANCIAL RISK MATRIX OR INDICES OF RISK APPRAISAL AND THE BUSINESS INTELLIGENCE BY CREDIT AGENCIES and GOALPOSTS AND YARDSTICKS IN SIMILAR CIRCUMSTANCES, SITUATIONS SHOULD BE UNIFORM. CREDIT RATING AGENCIES should not favour some particular client and discredit some others on a non-rational basis, the rating should never be allowed to be manipulated.
Here we have the 10 best credit rating agencies in India
1. Crisil Limited
2. Credit Information Bureau India Limited (CIBIL)
3. Fitch Ratings India Private Ltd.
4. Equifax
5. Credit Analysis & Research Ltd
6. ICRA Limited
7. ONICRA
8. High Mark Credit Information Services
9. SME Rating Agency of India Ltd. (SMERA)
10. Brickwork Ratings India Private Ltd.
_______________________________
INDIAN CORPORATES and their legal advisors do not do any due-diligence and compliance to applied laws and regulations BEFORE INVESTING IN DERIVATIVE/ SPECULATIVE TRADE; all they do is an eyewash and showcasing
Indian lending Institutions perhaps does not do proper due diligence/ risk appraisal prior to sanctioning of loan to the loan applicant.
Either Banks are not making use of their report intelligently between creditworthy clients and doubtful clients.
Or the business intelligence/ risk appraisal of credit agencies have no depth.
____________________________________
The FRDI Bill proposed to create a framework for overseeing financial institutions such as banks, insurance companies, non-banking financial services (NBFC) companies, and stock exchanges in case of insolvency. THE ‘RESOLUTION CORPORATION’, proposed in the draft bill, would look after the process and prevent the banks from going bankrupt. It would do this by “writing down of the liabilities”, a phrase some have interpreted as a “bail-in”.
It was felt that just like the resolution plan for borrower manufacturers i.e. in the form of Bankruptcy Code, there should be a law backing resolution mechanism for failing lender banking companies (Banks) also.
Another angle to it may be that in a Crisis situation, without bail-in entire economy would crash due to an uncontrollable chain reaction, it is a prophylactic emergency step.
Most regulators had thought that there were only two options for troubled institutions in 2008:
TAXPAYER (or GOVERNMENT) BAILOUTS ON A SYSTEMIC COLLAPSE OF THE BANKING SYSTEM.
BAIL-INS emerged as an attractive third option to recapitalize troubled institutions from within, by having creditors agree to roll over their short-term claims or engage in a restructuring. The result is a stronger financial institution that isn’t indebted to governments or external influencers — only its own creditors.
When those who are the most culpable in financial failures of Banks i.e. THE DEBTORS, THE REGULATORS, GOVERNMENT OFFICIALS (FINANCE MINISTRY PERSONNEL) AND BANK PERSONNEL are totally left unaccountable.
CREDITORS, WHO HAVE NOTHING TO DO WITH THE DEBTORS, BANK MISMANAGEMENT OR REGULATORY FAILURE, ARE ASKED TO SUFFER.
BANKS FAIL DUE TO
o SANCTIONING LOANS WITHOUT ADEQUATE SECURITY AND BUSINESS PURPOSE/ RELEVANCE,
o MISMANAGEMENT,
o NEGLIGENCE/ REFUSAL TO COMPLY WITH REGULATORY FRAMEWORK,
o TENDENCY TOWARDS WINDOW-DRESSING OF ANNUAL REPORTS AND COMPLIANCE NEEDS,
o PROBABLE GRAFT, NEPOTISM,
o MISDIRECTED PATRONAGE OF ILLEGAL ACTIVITIES,
o POLITICAL CLOUT,
o FRIENDLY PRESSURE,
o CORRUPT PURPOSE OF BANK EMPLOYEES AND REGULATOR OR
o DUE TO SABOTAGE BY INFILTRATION OF COMPETITORS IN YOUR ORGANIZATION/ BANK.
Coming to BANKING REGULATORY MECHANISM, BANKING REGULATION ACT, 1949 provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act. The Act gives THE RESERVE BANK OF INDIA (RBI) the power
o to license banks,
o have regulation over shareholding and voting rights of shareholders;
o supervise the appointment of the boards and management;
o regulate the operations of banks;
o lay down instructions for audits;
o control moratorium, mergers, and liquidation;
o issue directives in the interests of public good and on banking policy, and
o impose penalties.
THE CREDITORS ALSO SHOULD INCLUDE IN RUNNING/ MANAGING BANKS BY AMENDING PRESENT LAW/ RULES.
NOW, WILL LEGISLATURE/ GOVERNMENT/ REGULATOR GIVE THE CREDITORS OPTION OF REPRESENTATION IN MANAGEMENT OF THESE BANKING BUSINESSES IN A QUID PRO QUO FOR BAIL-INS AS EQUITABLE FIRST PRINCIPLE?
WILL THE GOVERNMENT AGREE FOR CREDITORS’ REPRESENTATIVES IN THE BOARD OF A NORMALLY FUNCTIONING HEALTHY BANK SO THAT THE CREDITORS CAN HAVE A SAY IN RUNNING PRUDENTLY THE BANK?
Essentially, there should be Trusts formed representing every category of Creditors, e.g. SAVINGS BANK DEPOSIT HOLDER’S TRUST, FIXED DEPOSIT HOLDER’S TRUST ETC, and then these Trusts should get representation in the Board.
____________________________________
What is the gist of changes for THE CREDITORS in The FRDI Bill, at present, if a bank becomes insolvent, a depositor gets nothing over and above the insurance limit that has been changed in the 2020 Budget in February 2020 i.e. Rs. 5 lakh by the RBI subsidiary THE DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION (DICGC)
But in case a bank becomes insolvent in the FRDI bill regime, the depositor gets the insurance amount and the balance gets converted into a longer-term instrument (i.e. money is not lost).
The contrast is clear. The depositor at least can stake claim over his money once the FRDI Bill (in its current form) comes. Unlike the past where he has to say goodbye to anything above Rs 1 lac.
Politicians of various stripes have started to raise red flags about a provision in a bill that the present Indian government intends to move in the Lok Sabha in the upcoming winter session, which could theoretically allow beleaguered banks and financial institutions to scoop up depositors’ money to stop them from going bust.
It is called a “BAIL-IN” – a concept coined and borrowed from the European banking crisis of 2008-09 – which has been sneaked into THE FINANCIAL RESOLUTION AND DEPOSIT INSURANCE (FRDI) BILL.
When a BAIL-IN is triggered, a bank’s depositors run the risk of being forced to bear a part of the burden of recapitalizing the entity. In effect, a part of their deposits may have to be written off. That is what happened to bondholders and depositors in Cyprus banks with more than 100,000 euros in their accounts.
Finance ministry officials have said there is no cause for alarm and the provision is meant to ensure emergency capital for banks. They pointed out that banks in India have been fairly well regulated and there have been very few bank failures since 1969 when banks were nationalized.
Some political parties have started voicing deep concern about Section 52 of the bill that could in certain circumstances allow a “specified service provider” – read a bank – to cancel, modify or change the liability that it owes. i.e. It can change/convert the nature of liability of Deposit to a bond or equity of the Bank.
But this will have to be done in consultation with (THE FINANCIAL STABILITY BOARD (FSB), THE RESOLUTION CORPORATION, to be set up under the legislation, which will have THE POWER TO PROVIDE DEPOSIT INSURANCE TO BANKING INSTITUTIONS, find ways to haul a failing bank back from the brink or act as a liquidator in the event that a liquidation order is given.

THE FINANCIAL STABILITY BOARD (FSB): https://rbi.org.in/Scripts/PublicationReportDetails.aspx…
“This is a serious issue,” says a former MP. “The Modi government seems to be surreptitiously sneaking in a measure to institute ‘hair-cuts’ on depositors’ money in a manner that is similar to what we have seen in Greece, Cyprus and other European countries which have gone through an economic crisis.”
A note posted by a political party recently said: “If the draft bill gets the nod of Parliament, it will empower THE RESOLUTION CORPORATION to cancel a bank’s liability or alter it to another security.”
The BAIL-IN instrument may “convert any securities from one class to another, including the creation of a new security in the modification of an existing security”, the legislation says.
Before a BAIL-IN instrument is to be activated, THE RESOLUTION CORPORATION will have to inform the central government about the reasons for issuing it in the first place and the effects it will have. A copy of that report will have to be immediately placed before each House of Parliament.
Finance ministry officials, however, are playing down the campaign against the BAIL-IN provision in the bill.
“The purpose of the ‘BAIL-IN’ is to help BRING IN EMERGENCY CAPITAL FOR BANKS. It does not mean that this clause will be used and certainly cannot be invoked for PSU banks which are covered fully by the state’s sovereign guarantee,” etc etc said a ministry official.
The FRDI BILL should include the creditors also, in running/ managing the banks.
A Legal Provision has to be created in the FRDI BILL by legislature/ government/ regulator to give the creditors option of representation in the management of these banking businesses in a quid pro quo for bail-ins as an equitable first principle.
The government should be open for THE CREDITORS’ REPRESENTATIVES on THE BOARD of a normally functioning healthy bank so that the creditors can have a say in running prudently the bank.
Essentially, there should be trusts formed representing every category of creditors, e.g. SAVINGS BANK DEPOSIT HOLDER’S TRUST, FIXED DEPOSIT HOLDER’S TRUST etc, and then these trusts should get REPRESENTATION IN THE BOARD.

RISK COVER OF DEPOSITS
At present, a depositor in a bank can draw partial comfort from the fact that his deposit is insured to the extent of Rs 5 lakh with THE DEPOSIT INSURANCE AND CREDIT GUARANTEE CORPORATION which was set up under an act of Parliament in 1961.
The Rs 5 lakh cover is meant for all deposits of an individual parked in savings bank and current bank accounts and held as fixed deposits, irrespective of how much is parked in these accounts.
_________________________
The FRDI LEGISLATION will change that significantly. The bill empowers THE RESOLUTION CORPORATION to decide the amount insured for each depositor. Theoretically, it is possible that the insured amount will vary for customers across different banks and different categories. It could also vary for different categories of customers within the same bank.
A CORPORATION INSURANCE FUND will be created that will serve as the vehicle through which the deposit insurance will flow.
The corporation, in consultation with the appropriate regulator, shall specify the total amount payable by the corporation to anyone depositor.
The decision on how much the insured amount should be/ will have to be decided by THE REGULATOR, which in the case of the banking industry is THE RESERVE BANK OF INDIA. It would be fair to assume that once the bill is passed, THE REGULATOR will clarify the amount to be insured. It has not given any such indication yet whether the sum would be higher or lower than the existing level of Rs 5 lakh.
_________________________
The FRDI legislation, however, introduces the idea of SYSTEMICALLY IMPORTANT FINANCIAL INSTITUTIONS, which became a buzz phrase after the global economic crisis of 2008.
Basically, it creates THE NOTION REGARDING BANKS that are perceived as “too big to fail” and therefore forces regulators to step in with a bailout plan.
The theory suggests that some financial institutions are SO LARGE AND SO INTERCONNECTED that their failure would be disastrous to the economic system with the potential of having knock-on effects.
India has already embraced THIS CONCEPT AND HAS DESIGNATED THREE BANKS – STATE BANK OF INDIA, ICICI BANK, AND HDFC BANK – as systemically important, which subjects them to higher levels of compliance with tough prudential standards.
India’s banking sector is currently in the throes of distress as a bad loan problem has erupted in the wake of several years of slow industrial growth.
According to the RBI’s FINANCIAL STABILITY REPORT released in June 2017, the gross non-performing advances (NPAs) or bad loans to total deposits ratio of all banks stood at 9.6 percent as of March 2017. State-run banks currently have an even higher bad loan ratio of 13.69 percent.
_________________________
DOWNFALL OF BANKS IN INDIA
Bank of Hindustan, founded 1786. Ended in 1832.
General Bank of Bengal and Bihar which were established in 1773 lasted very few years.
Indian Specie Bank lasted till 1911.
Bengal National Bank – NA
Bombay Merchants Bank – NA
Union Bank which was founded in 1839, failed in 1848 as a consequence of the economic crisis of 1848-49
Bank of Upper India – Started in 1863 and failed in 1913.
Oudh Commercial Bank came into existence in 1881 in Faizabad but failed in 1958.
Palai Central Bank founded in 1927 and closed in 1960
Global Trust Bank ended in 2004 because of scams.
__________________________________
Effect of Economic Recession on Indian Banks
DEPRESSION OF 1913 – 1918:
94 banks in India failed between 1913 and 1918 as a result of recession:
YEAR OF FAILURE – NO. OF BANKS FAILED
1913 – 12
1914 – 42
1915 -11
1916 -13
1917 – 9
1918 – 7
2008 – Year of Great Depression and its effect on Indian Banks
__________________________________
Since 1947 Partition Bank Failures
No. of banks ended their operations after the 1947 partition.
(YEAR – NO. OF BANKS FAILED)
1947 – 38
1948 – 45
1949 – 55
1951 – 60
1952 – 31
1953 – 31
1954 – 27
1955 – 29
__________________________________
The economic crisis which affected majorly to the banks in the United States of America had also resulted in the bankruptcy of 18 Indian co-operative banks during the economic year 01st April 2008 till 31st March 2009.
o District Cooperative Bank Ltd of Gonda in UP.
o The Maratha Co-operative Bank of Karnataka
o Parivartan Co-operative Bank of Maharashtra
o Ravi Co-operative Bank
o Indira Priyadarshini Mahila Nagrik Sahakari Bank of Chhattishgarh
o Varda Co-operative Bank
o Harugeri Urban Co-operative Bank
o Kittur Rani Channamma Mahila Pattana Sahakari Bank
o Challakere Urban Co-operative Bank
o Basavakalyan Pattana Sahakari Bank
o Vasantdada Shetkari of Sangli
o Shri PK Anna Patil Janata Bank
o South Indian Co-operative Bank Ltd
o Rohe Ashtami Sahakari Bank Ltd
o Ajit Sahkari Bank
o Bhavnagar Mercantile Co-operative Bank
o Chalisgaoan Cooperative Bank
o Hirekerur Bank
_____________________________
STORY OF UNSTABILITY OF BANKS IN INDIA
THE BANK OF KARAD (BOK) AND THE MUMBAI MERCANTILE CO-OPERATIVE BANK (MCB)
HARSHAD MEHTA did a scam in 1992. KETAN PAREKH worked in his firm, who later would be involved in his own replicated scam (in 2004). The instrument used in a big way was THE BANK RECEIPT (BR). In a ready forward deal, securities were not moved back and forth in actuality. Instead, the borrower, i.e. the seller of securities, gave the buyer of the securities a BR. The BR confirms the sale of securities. It acts as a receipt for the money received by the selling bank. Hence the name – BANK RECEIPT. It promises to deliver the securities to the buyer. It also states that in the meantime, the seller holds the securities in the trust of the buyer.
Having figured this out, Mehta needed banks, which could issue fake BRs, or BRs not backed by any government securities. Two small and little known banks – THE BANK OF KARAD (BOK) AND THE MUMBAI MERCANTILE CO-OPERATIVE BANK (MCB) – came in handy for this purpose.
Once these fake BRs were issued, they were passed on to other banks, and the banks, in turn, gave money to Mehta, plainly assuming that they were lending against government securities when this was not really the case
THE BANK OF KARAD (BOK) and THE MUMBAI MERCANTILE CO-OPERATIVE BANK (MCB) – came in handy for this purpose.
BANK OF KARAD (BOK), the old private sector bank started in 1946 from Karad, Maharashtra. It was a victim of the 1992 securities scam. The bank was used by stockbrokers like BHUPEN DALAL during the infamous HARSHAD MEHTA -led scam in 1991-92. THE BANK OF KARAD (BOK) was placed under liquidation at the instance of the Reserve Bank by the High Court of Bombay by its ad-interim order dated May 27, 1992. The bank was finally wound up vide winding-up order of the Bombay High Court dated July 20, 1994, and THE BANK OF INDIA took over 48 branches of BOK. It was a forced merger under the direction of THE RESERVE BANK OF INDIA (RBI) and the Government of India (GOI).

MAIN REASONS/ MOTIVES OF MERGER:
RBI merged sick banks with healthy banks to protect depositor’s interests.
BOK was a victim of a 1992 Securities scam.
The bank was used by stockbrokers like BHUPEN DALAL during the infamous HARSHAD MEHTA -led scam in 1991-92. Scamsters persuaded the BANK OF KARAD and THE METROPOLITAN COOPERATIVE BANK (MCB) to issue BANK RECEIPTS (BR) as and when required. These BRs could then be used to do ready-forward deals with other banks. The cheques in favour of THE BANK OF KARAD were credited into the brokers’ accounts.
The only option left out was either liquidation or merger with another strong bank (i.e. THE BANK OF INDIA.)
_______________
MADHAVPURA MERCANTILE COOPERATIVE BANK before the scam
MADHAVPURA MERCANTILE COOPERATIVE BANK was conducting normal banking activities with a deposit base of Rs 12 billion, of which Rs 6 billion was from other co-operative banks and organizations, while the rest is from the public. Depositors had put huge deposits after the bank had received scheduled bank status from THE RESERVE BANK OF INDIA.

WHEN DID THE TROUBLE START?
THE RESERVE BANK OF INDIA restricts co-operative banks from capital market activities. Scheduled co-operative banks are allowed to invest 10 percent of their net worth in capital markets and allied activities.
MADHAVPURA’s cash reserve ratio (CRR) and statutory liquidity ratio (SLR) were in line with THE RESERVE BANK OF INDIA norms in the third quarter ended on December 31, 2000. It is believed that in the last two months, the bank has made extensive and imprudent advances.
MADHAVPURA MERCANTILE COOPERATIVE BANK chairman RAMESH PARIKH had accommodated big bull KETAN PAREKH, with whom he had business dealings. It is believed that advances to the tune of Rs 2 billion have been given by RAMESH PARIKH to big bull KETAN PAREKH.
If this was not sufficient, there are other allegations. RAMESH PARIKH’s son Vinit Parikh runs a company called MADHUR CAPITAL and FINSTOCK LIMITED, which deals in shares. Parikh is alleged to have paid off his son’s dues at the stock market through MADHAVPURA MERCANTILE COOPERATIVE BANK’s fund. According to market sources, Vinit Parikh incurred losses of Rs 500 million in the recent stock market crash.

THE RUN ON THE BANK
On March 8, residents of Ahmedabad heard rumours of the bank having granted a bank guarantee of Rs 1.5 billion to KETAN PAREKH. This resulted in panic among the depositors who started withdrawing deposits. The next day the bank faced a liquidity crisis and since then the bank has been in trouble.

WHY DID THE RESERVE BANK OF INDIA SUPERCEDE THE BANK BOARD?
Faced with an acute liquidity crisis, MADHAVPURA MERCANTILE COOPERATIVE BANK has been forced to pull down the shutters of its branches in Ahmedabad and Bombay.
A preliminary inquiry conducted by THE RESERVE BANK OF INDIA revealed that the bank’s liquidity position was precarious after it issued pay-orders of Rs 650 million to the depositors. However, the bank was not in a position to honour pay-orders amounting to Rs 650 million, which was issued by the bank. This situation forced THE RESERVE BANK OF INDIA to recommend the Central Registrar of Co-operative Banks to supersede the board of the bank and appoint an Administrator.

HOW IS BANK OF INDIA INVOLVED?
Bank of India is the worst hit in the pay-order scam from MADHAVPURA MERCANTILE CO-OPERATIVE BANK. MADHAVPURA MERCANTILE COOPERATIVE BANK had issued pay-orders worth Rs 1.2 billion to KETAN PAREKH. In turn, Parekh had discounted these pay-orders, which bounced later.
A pay-order is similar to a demand draft but is valid only in the same center. The issuing bank is required to debit the account of the person who takes the pay-order. Thus the other bank, that receives the instrument, safely presumes that the money has already been recovered by the issuing bank and the instrument is secured. The difference in the case of MADHAVPURA MERCANTILE COOPERATIVE BANK was that the money was not debited, and Vinit Parikh’s company MADHUR CAPITAL was instrumental in the issuance of a large number of pay-orders, that were dishonoured.

WHO ARE THE MAIN CULPRITS?
MADHAVPURA MERCANTILE COOPERATIVE BANK’s chairman RAMESH PARIKH, the bank’s CEO Devendra Pandya, MADHUR CAPITAL, and KETAN PAREKH are the culprits.

WHAT IS THE STATUS OF COLLATERAL SECURITIES?
THE RESERVE BANK OF INDIA has carried out investigations but the final findings of the report have not been disclosed. It is believed that considering the business relationship of RAMESH PARIKH and KETAN PAREKH, not enough collateral had been sought.
KETAN PARIKH was involved in a scam, which was investigated by THE RESERVE BANK OF INDIA. On 13 March 2001 THE RESERVE BANK OF INDIA found out that the MADHAVPURA MERCANTILE COOPERATIVE BANK’S net worth was −₹1,147.13 crores (US$180 million), its deposit erosion was 90.9% and gross non-performing assets were 88.2% and ₹1,192.81 crores (US$190 million). The next day, the registrar superseded the board and appointed an administrator as the overseer of the bank. On 23 August a scheme for the reconstruction of the bank was approved by THE RESERVE BANK OF INDIA for a period of 10 years. Further investigations revealed that after chairman Ramesh Chandra Parikh’s son Vinit had lost ₹50 crores (US$7.9 million) in the stock-market crash, his losses were paid for through the bank’s funds.
By February 2004 the bank was able to recover ₹200 crores (US$31 million) from other banks; KETAN PAREKH had returned only ₹6 crores (US$940,000). He was arrested that August, and in December a special Central Bureau of Investigation (CBI) court set up for the case canceled Parekh’s conditional bail after he failed to pay the promised ₹380 crores (US$60 million). In June 2003, a New Delhi court granted the CBI a five-day remand of the two MANIAR GROUP STOCKBROKERS – SHIRISH MANYAR AND MUKESH BABU. Charge sheets were filed against MADHAVPURA MERCANTILE COOPERATIVE BANK chairman Parikh, its CEO Devendra Pandya, KETAN PAREKH, and his associate Dharmesh Joshi. Joshi’s bank account in London containing £6 million was frozen by the CBI in March 2006.
RESERVE BANK OF INDIA found out on 31 March 2011 that the bank’s net assets were worth -₹1,316.50 crores (US$210 million) and deposit erosion was 100 percent, the gross non-performing assets were -₹1,126.55 crores (US$180 million) and losses were ₹1,357.41 crores (US$210 million). After the reconstruction scheme expired on 23 August 2011 and after seeing no major improvement in the bank’s performance THE RESERVE BANK OF INDIA advised the Government of India on 26 December to liquidate the bank. On 4 January 2012, the Central Task Force for Cooperative Urban Banks also gave the same advice to the Government of India.
THE RESERVE BANK OF INDIA issued a show-cause notice to the bank on 16 March 2012 asking why its banking license should not be canceled. The cooperative bank replied that the main reason for the failure of the restructuring scheme was the unwillingness of the other cooperative banks to fulfill their commitments and it suggested another revival plan in which an NRI was willing to give ₹500 crores (US$79 million) to the bank for a period of 10 years through the World Bank. It was able to recover only ₹3 crores (US$470,000) from public defaulters and ₹800 crores (equivalent to ₹23 billion or US$360 million in 2017) were debt on KETAN PAREKH. Also, the bank neither had any background information regarding the NRI who was willing to help nor the source of his funds. Seeing this THE RESERVE BANK OF INDIA canceled the bank’s license with effect from 4 June 2012.
As of 5 June 2012 Parekh had paid only ₹329 crores (US$52 million). Parekh alone had to pay ₹569 crores (US$89 million) at the interest rate of 12% per year resulted in ₹668 crores (US$100 million).
As of June 2013, 700 civil and 230 criminal cases filed by the bank were pending in various courts. Several cases were filed against the bank and in 70 of these cases trial hadn’t begun as of March 2014. One of the accused Ramesh Chandra Parikh, former chairman of the bank died in 2007 while in judicial custody. In January 2011 the public prosecutor in the case, Chetan Shah demanded re-investigation of the case.
After the scam was unfolded THE RESERVE BANK OF INDIA restricted the cooperative banks from providing money to brokerage firms, giving assistance against securities such as shares and debentures, and formed task forces to formulate revival plans for the banks that were affected. In most cases, the affected bank was merged into a bigger Urban Cooperative Bank. The banking regulatory authority increased the number of inspections of balance sheets of cooperative banks from once in two years to every year. A parliamentary panel was set up to investigate the stock market scam. The panel found out that the urban cooperative banks were manipulating their activities and that in absence of any inspecting authority many brokerage firms were using funds provided by these banks to manipulate the market. After the scam cooperative banks found it difficult to win back the trust and confidence of their customers. Chairman of THE NATIONAL FEDERATION OF URBAN COOPERATIVE BANKS & CREDIT SOCIETIES LTD, H K Patil had said.
At a time when THE RESERVE BANK OF INDIA of India did not allow banks to lend more than Rs 15 crore to stockbrokers, MADHAVPURA MERCANTILE COOPERATIVE BANK had fraudulently issued pay orders worth Rs 12 crore to Mumbai-based stock broker PAREKH, and huge sums to BABU AND MANIAR.
MADHAVPURA MERCANTILE COOPERATIVE BANK has offered its borrowers the final opportunity to settle their dues. In a press note, in April 2016 the bank said the scheme will cover all accounts except those of KETAN PAREKH, MUKESH BABU, AND SIRISH MANIAR of MANIAR GROUP.
_______________
The case of GLOBAL TRUST BANK (INDIA) (GTB).
GLOBAL TRUST BANK (INDIA) (GTB) was founded on 21 October 1994 and commenced operations at Secunderabad. Its founders included RAMESH GELLI (its first Chairman), SRIDAR SUBASRI, AND JAYANT MADHOB, among others. The bank introduced a number of technology-based innovations and responsive service.
GTB was involved in the stock market scam of 2001 that the stockbroker KETAN PAREKH ran. GTB lent heavily to individuals speculating in the stock market; when the market crashed the bank suffered extensive losses. One consequence was that merger talks with UTI Bank fell through. THE RESERVE BANK OF INDIA (RBI) forced GELLI to resign. GELLI ‘S successor resigned after six months, and GELLI ‘S son joined the board of directors. In 2004, GELLI briefly returned to the bank in February 2004 before being again forced to resign.
RBI examined GTB’s accounts for 2001-02 and found that GTB’s net worth had turned negative, but did not close the bank. GTB did not address its problems. Instead, and despite its dire straits, GTB continued to grow. It had 87 branches in 2002-2003 and grew to 103 branches before the RBI forced it to close. It also paid interest on deposits at a rate equal to or better than other banks in its area. GTB sought to recapitalize itself by bringing in new investors. In mid-2004 GTB was in close talks with Newbridge Capital. Newbridge was to invest US$200million, subject to RBI approval. However, RBI was reluctant to permit private investors to restructure GTB.
The RBI issued a Moratorium Order on 24 July 2004. Before GTB’s winding up, Goldman Sachs owned 4% of the bank and the International Finance Corporation owned 5%. Oriental Bank of Commerce acquired GTB on 14 August 2004. Shareholders in GTB received nothing for their shares; depositors, however, suffered no loss. After acquiring GTB, OBC discovered that GTB’s situation was even worse than it had appeared at the time of acquisition. OBC did gain an increased presence in the southern parts of India, where its presence had been weak and GTB’s was extensive.
GTB had been leaner than OBC. OBC had ten times the staff and branches than GTB, but only four to five times as much in the form of deposits, investments, or advances.
The instance was when GLOBAL TRUST BANK (INDIA) (GTB) almost went belly up after taking exposure to capital markets that breached regulatory caps. GTB was eventually merged with ORIENTAL BANK OF COMMERCE and none of its 1 million depositors lost any money. GTB shareholders, however, had to take a hit.
___________________
In what is known as DERIVATIVE SCAM Banks suffered a heavy loss.
THE RESERVE BANK OF INDIA slapped a maximum penalty, according to THE BANKING REGULATION ACT, on 19 commercial banks for mis-selling illegal derivative products to exporters in 2011.
Mis-selling of derivative products: RBI acts
ROYAPETA BENEFIT FUND (RBF) a Non-banking Finance Company (Nidhi company) had defaulted Rs.454 Crores of deposit amount to 1, 92,000 depositors during the year 1999. After that within a couple of years in a series of defaulting Nidhi Companies increased to more than ten.
The Economic Offences Wing (in Department of Company Affairs) in bringing the culprits in the eyes of law, who defrauded the depositors in co-ordination with the other agencies like the Board of Directors appointed by the CLB and the OL. Cases were filed in High Court for dissolution of the Nidhi and criminal cases were filed against the Directors of the Nidhi.
The total amount involved (in case of RBF alone): Rs.454 Crores.
Total no. of depositors: 1, 92,000
Police complaints: Rs.32 Crores (20, 000 depositors).
Amount settled: Rs.133.37 Crores @ 25%.
58, 653 depositors got their full amount (for deposits up to Rs.5, 000/-).
Last refund made during January 2006.
Remaining amount to be settled: Rs.320.62 Crores for 1, 33,347 depositors.
A sum of Rs.9.5 Crores is available with OL for the next disbursement.
Seven accused convicted for two years imprisonment and Rs.10, 000/- fine during March 2005.
The criminal appeal filed by the convicted accused is pending in the Honourable High Court.
Preliminary investigation revealed that Rs. 120 crores was advanced to a firm called BALAJI GROUP, whose CMD Mr. MR. SRINIVASALU REDDY was a former RBF director. Similarly, it is alleged that a sum of Rs. 40 crores were loaned to two persons- MR. PANDEY AND MR. PRADEEP KOTHARI. It is also charged that the ALSA Group of companies had obtained Rs.30 crores from RBF for business purposes.
Four directors of THE ROYAPETA BENEFIT FUND (RBF) were arrested by the City Crime Branch police on charges of cheating thousands of depositors to the tune of Rs. 370 crores. Police identified the arrested persons as MESSRS. VENKATESAN, NIRMAL KUMAR, HUBERT FENELON, AND UNNI.
______________________
In the Kingfisher Airlines Loan case, the information has surfaced that the Guarantees provided for the Debt were steeply overvalued by Consortium of Banks
______________________
A new scam has surfaced in the Banking sector involving Diamond Trader NIRAV MODI
NIRAV MODI bribes several PNB senior staffs (Salaried class employees) to provide bank guarantees without any verified credit rating/ material guarantee asset with the bank in 2011
Using these fraudulent bank guarantees (with no verified credit rating/ guaranteeing asset) he raised several loans from foreign banks
Now that NIRAV MODI has defaulted on foreign loans, so the bank is left to pay his loans to foreign banks due to default because they have pledged guarantee to his loans.
NIRAV MODI has reportedly sought 6 months’ time from PNB to repay the loan
NIRAV MODI left India on 1 January.
On 15 February, ED raided nine premises of entities involved in the case. ED files money laundering case against NIRAV MODI, others
CBI receives two complaints from Punjab National Bank (PNB) against NIRAV MODI, alleging fraudulent transactions to the tune of Rs 11,292 crore.
The bank suspended 10 officials in connection with the case
Two complaints had also been filed regarding alleged fraud of Rs 280 crore was reported against Modi and others in January.
The Central Bureau of Investigation (CBI) received two complaints from Punjab National Bank (PNB) against NIRAV MODI, alleging fraudulent transactions to the tune of Rs 11,292 crore. These two complaints come just a few weeks after an alleged fraud of Rs 280 crore was reported against Modi and others in January.
Government sources said that Modi and his family fled the country in the first week of January much before the CBI received a complaint from PNB on 29 January.
NIRAV MODI’s brother Nishal Modi, a Belgian citizen, also left India on 1 January. NIRAV MODI’s wife, who is an American citizen, left India on 6 January and Mehul Choksi fled on 4 January, official sources told news agency ANI.
CBI had issued lookout circulars against all accused on 31 January.
A total of 150 lookout circulars were issued to NIRAV MODI by the PNB as per the complaint filed to CBI
The Central Bureau of Investigation questioned Punjab National Bank bank officials in connection with the NIRAV MODI fraud case but no arrests have been made yet, ANI reported. On Wednesday, the bank had suspended 10 officials from its Mumbai branch.
In his press briefing, Union Minister RS Prasad said, “No one in the banking system who has helped NIRAV MODI shall be spared. No matter what designation the person holds, we will take strict measures.”
__________________
In a related case to Global Trust Bank, In Central Bureau of Investigation Bank Securities and Fraud Cell Vs RAMESH GELLI and Others in the Supreme Court on 23 February 2016, SC lashed out at legislature for leaving a gap in amending work in the related field, that there were anomalies between the two statutes. Which has huge implications for banks, regulators, and consumers. That corresponding amendment in Section 46A of the Banking Regulation Act (BRA) was missing.
Poor attention to detail by the law ministry meant that changes in the Indian Penal Code, in line with changes to the PCA, were not accompanied by a simultaneous amendment to Section 46A of the Banking Regulation Act (BRA). The SC order, in dealing with this omission said, “Section 46-A of Banking Regulation Act, 1949, cannot be left meaningless and requires harmonious construction.” Pertinently, the substance of Section 46A would not be defeated merely because the Prevention of Corruption Act deleted a few Sections from the Indian Penal Code without making corresponding changes to the BRA.
In another related case to Global Trust Bank, In RAMESH GELLI Vs THE INSPECTOR OF POLICE on 28 August 2017 in the Madras High Court, said that Even a Private Sector Bank employee is also a Public Servant for purposes of Prevention of Corruption Act
____________
A new factor has emerged in credit rating that is a HEALTHY CASH FLOW.
Two months prior to the ILFS crash due to CASH CRUNCH, it was rated by credit rating agencies AAA.
Now, people are questioning the rating.
As to why CASH CRUNCH was not included in the MATRIX and INDICES of the credit rating agencies?

Posted on: October 26th, 2020