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Quivering bankers try to stem the rot

George Smith Alexander

The unearthing of the Madhavpura Mercantile Cooperative Bank pay order scam and the arrest of the Big Bull Ketan Parekh and his associates has sent shivers down the spine of the Indian banking system.

Banks across the board are going slow on their capital market advances, while most of the co-operative banks have totally stopped lending against shares.

Says Mandvi Cooperative Bank's managing director Narendra Mehta, "We have stopped lending against shares. Our loans against shares portfolio is to the extent of only Rs 20 million, which are spread out among 80 to 100 customers. As the market has fallen drastically there is no demand for this products now."

Sources also pointed out that though co-operative banks are not allowed to lend to brokers, the money is routed through employees of the brokers or even the brokers themselves in the form of personal loans.

The RBI has allowed banks to lend loans up to Rs 2 million against dematerialised shares with minimum margins of 25 per cent.

Some of the private sector banks have put the brakes on loans against shares. Bank of Punjab chairman Darshanjit Singh, said: "We are going slow on the loans against shares category and concentrating on home loans, auto loans, rural loans etc. We are going back to the roots."

Banks have also lend to the non-banking finance companies (NBFCs) and to corporates without monitoring the end use of the funds.

In the case of NBFCs, though loans have not been forthcoming after the CR Bhansali scandal a couple of years back, there are quite a few banks that have been helpful lenders. NBFCs take loans from banks for working capital and in turn, they finance the brokers.

"They do not have stringent norms like banks. The money is routed to them mostly in the form of inter-corporate deposits," a banker said.

The same is true even in the case of the corporates who take overdraft from the banks. "Though the end use of the funds have to be strictly monitored there are many banks who turn a blind eye to this," a bank chief pointed out.

Sources pointed out that many of the public sector banks and co-operative banks have not taken into cognisance the falling value of the collaterals. The reason behind this is the lack of the technological expertise of these banks unlike that of some of the new private sector banks or foreign banks who have been aggressive players.

Bankers and analysts expect a steep fall in the capital markets in the next few days. This could affect the retail loan portfolio of the loans against shares.

"With the (bourse) fall, the collateral value is also obviously going to take a hit. We are watching the situation closely specially the retail portfolio. The actual scenario will be known once the audit process of many of these banks starts off. The customers are however going to be affected badly as they may not have fresh shares to deposit with the banks after the recent meltdown," said a senior executive in a private bank.

Bank of Punjab's exposure in the funded exposure in the capital market is Rs 1.19 billion of which the loan to brokers is to the extent of Rs 790 million with the remaining to the retail market as personal loans against shares.

The bank's exposure to the Ketan Parekh group is to the tune of Rs 100-150 million, which the bank's chairman Darshanjit Singh says is fully backed by collaterals.GTB's funded exposures is in the region of Rs 3.75 billion which it plans to bring down to Rs 3 billion.

According to bank officials, "The bank's exposure in Ketan Parekh group was in the tune of Rs 1.18 billion a month before is now at Rs 910 million. The bank has asked the group to reduce the exposure more. The bank has collateral worth Rs 1 billion."

HDFC Bank's exposure to brokers have fallen from around Rs 1.50 billion to Rs 700 million while IndusInd Bank has cut down its exposure from Rs 1.50 to Rs 1.20 billion.

ICICI Bank funded exposure is to the tune of only Rs 600 million. Among the foreign banks Standard Chartered's exposure in the stock market is to the tune of Rs 9 billion while in the cases of Citibank the exposure is over Rs 6 billion.

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