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RBI to probe bank over bounced cheques

The Reserve Bank of India is probing the working of a cooperative bank which specialises in bullion trading, after its cheques to four commercial banks bounced, a senior central bank official said on Thursday.

"We are investigating Classic Cooperative Bank. It had issued bankers' cheques without having the appropriate amount in its account," V S Das, RBI's regional director for the western region, said from Ahmedabad.

Das declined to specify the amount of the cheques but senior bankers pegged it at Rs 600 million.

Classic Cooperative Bank, headquartered in Ahmedabad, was lent money by State Bank of India, Bank of India, Standard Chartered Bank and Punjab National Bank to buy gold for them and deliver it at a future date, Das said.

Das said the RBI was investigating whether the bank instead diverted those funds to the Indian stock market, which has fallen sharply since March 1.

Media reports have said that several banks could have flouted central bank rules on exposure to the capital markets and could have burnt their fingers as a result of recent share price falls. The benchmark Bombay exchange index has lost over 14 percent from its midday high on March 1.

Bank of India executive director O.N. Singh said that the bank had been defrauded of Rs 50 million by Classic Cooperative and he had given instructions to a regional manager to take legal action to recover the money.

An SBI official also said his bank had been defrauded and was considering legal action.

Officials of Standard Chartered Bank, Punjab National Bank and Classic Cooperative were not available for comment.

Volatile markets

This could be the second instance of a co-operative bank facing liquidity problems due to the recent volatility of Indian share markets.

Earlier this month, Madhavpura Mercantile Co-operative Bank, based in Ahmedabad, faced a run on its deposits due to apparently excess exposure to share markets.

The RBI has suspended that bank's management, appointed an administrator and launched a probe into its working.

Despite the troubles facing the two cooperative banks, senior bankers said the banking system was not at risk as there were clear central bank guidelines on lending against shares and to share brokers.

They said large commercial banks were unlikely to have flouted these guidelines and were therefore not at risk.

On Saturday, Finance Minister Yashwant Sinha said there was no cause for concern over banks' exposure to stock markets. He said less than 2 per cent of outstanding bank loans were to stock brokers and to finance stock investments, much lower than the 5 per cent allowed by the central bank.

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