Ahmedabad-based Madhavpura Mercantile Co-operative Bank (MMCB), now in the thick of a pay-order scam in Bombay, has had problems ever since the recent stock market collapse began with depositors queueing up to demand their money back, an infection that spread to other cooperative banks in the state too.

The bank had come under adverse notice for alleged violation of banking norms to fund stock brokers as early as 1998. It was reportedly violating banking norms to fund the arrested Bombay-based leading broker Ketan Parekh, who is said to have close ties with MMCB chairman Ramesh Parekh. So what exactly went wrong with the bank? Jigna Shah attempts to find out.

What is Madhavpura Bank?

Madhavpura Mercantile Co-operative Bank was established on October 10, 1968 with the primary objective to cater to the banking needs of wholesale grocery traders of Madhavpura area in Ahmedabad. Two years ago, the bank got the status of scheduled bank from Reserve Bank of India, which permitted the bank to expand its banking activities outside Gujarat.

Before RBI superceded the bank's board on March 15, Madhavpura Bank had 12 directors on its board including chairman Ramesh Parikh, CEO and managing director Devendra B Pandya, Ramanlal M Parikh, Natverlal V Desai, Manilal G Shah, Prabhudas Kothari, Natverlal Thakkar, Purshottamdas Shah, Pravinchandra Shah, Dinesh Majumdar, Sevantilal Shah and Pravinchandra Patel.

Madhavpura Bank before the scam

Madhavpura 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 organisations, while the rest is from the public. Depositors had put huge deposits after the bank had received scheduled bank status from RBI.

When did the trouble start?

RBI restricts co-operative banks from capital market activities. Scheduled co-operative banks are allowed to invest 10 per cent 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 RBI 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 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 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 RBI supercede the bank board?

Faced with acute liquidity crisis, Madhavpura Bank has been forced to pull down the shutters of its branches in Ahmedabad and Bombay.

Preliminary inquiry conducted by RBI 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 RBI to recommend Central Registrar of Co-operative Banks to supercede 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 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 centre. 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 case of Madhavpura Bank was that the money was not debited, and Vinit Parikh's company Madhur Capital was instrumental in the issuance of large number of pay-orders, that were dishonoured.

Who are the main culprits?

Madhavpura 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 RBI 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.

Money

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