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April 2, 2001
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Money > Business Headlines > Report April 2, 2001 |
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RBI estimates Madhavpura damage at Rs 12 billion
Stung by the magnitude of the Madhavpura Mercantile Cooperative Bank scam, the Reserve Bank of India has swung into action and drawn up a four-pronged strategy to protect the banking system. The four prongs are revision of the norms for pay orders and demand draft discounting, stock lending and banks' capital market exposure, gold lending and, fine-tuning of the payments system. An internal RBI estimate has pegged the sum involved in the scam at around Rs 12 billion, higher than the Central Bureau of Investigation's estimate of Rs 8.43 billion. The Rs 12 billion estimate includes diversion of funds by the management of the Madhavpura Bank and its exposure to Ketan Parekh, overnight call money advances by a clutch of banks and the pay order scam. A CBI team discussed the issue with RBI deputy governor SP Talwar as well as Bank of India chairman-cum-managing director KV Krishnamurthy on Saturday. According to sources close to the central bank, over the next few weeks, the RBI will revise norms on bullion lending, stock lending, banks' capital market exposure and the practice of discounting pay orders and demand drafts. It is also looking closely at the payment system (clearing house operations) and is preparing to define counter party risk and address other grey areas without losing time. "Most of the changes will be incorporated in the forthcoming credit policy," said a source. In a parallel move, the RBI is working with the ministry of finance to revamp the co-operative banking system. "By and large, the government is willing to implement the Madhav Rao committee's report on co-operative banks by raising the entry level and other relevant issues. The RBI will be given a larger role to play in the co-operative sector," a source said. The central bank has cancelled licences of about 80 co-operative banks in the last two years. While the standing committee on capital markets, comprising the RBI and Securities & Exchange Board of India, is making the necessary changes to restrict stock brokers' unlimited access to bank funds, an internal RBI committee is redefining the bullion lending norms. The existing norms say a bullion bank should have fairly advanced risk-management system in place to be able to identify the risks involved in supplying gold to the eligible categories and evolve control measures. They also say that loans should be given only to jewellery exporters, and the interest charged to the borrowers should be linked to the international gold interest rate. Loans to jewellery exporters in India will be subject to capital adequacy and other prudential requirements. The pay order scam, which left Bank of India holding Rs 1.37 billion worth of instruments not backed by funds, has prompted the RBI to look into discounting norms for pay orders and demand drafts as well as the entire clearing system. "Under the law, a clearing house cannot take a settlement risk as it is not a legal entity. The central bank is looking into aspects of counter party risks. In this case, only two parties (BoI and Madhavpura) were involved, but if more than two parties are involved, unwinding (return of instruments) can cause a gridlock. The RBI wants to put in place a foolproof system before instant fund transfers are introduced on a large scale," a source said.
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