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Slimy characters, shabby institutions and scams

The CRB scandal which is attracting 48-point headlines in the lay as well as financial press has chewed up thousands of column centimetres of newsprint. Representatives of the new generation of media business analysts are twisting themselves into knots to unravel the mystery of how in a grossly over-regulated and over-administered society an unprepossessing individual of no particular merit has run up a debt estimated at an astonishing Rs 12 billion before having the whistle blown on him.

But business analysts in the media and elsewhere are less blame-worthy than protectors of the public interest on the public payroll who are duty-bound to prevent buccaneers such as Bhansali from skimming the hard-earned savings of lay investors. Piece-meal and fine print accounts of the CRB scam indicate that despite his dramatic arrest and speedy informal extradition from Hong Kong, Bhansali has done well for himself and has made adequate provision for his near and dear ones.

Every respectable citizen who has experienced the sheer frustration of attempting to raise a paltry sum from the nation's over-regulated, paper-intensive banking system is likely to wonder how the now-so-good Bhansali managed to run up a debt of Rs 12 billion within a decade after CRB commenced business as a non-banking finance company. An attempt to unravel this mystery is likely to unearth a whole lot of shabby institutions manned by slimy characters drawing salaries and perks from the public exchequer without bothering to give the public value for money.

Top of the list is the venerable Reserve Bank of India. In the wake of the CRB scandal, it has now come to light that there are over 40,000 NBFCs doing business in India and that barely 2,000 of them meet the RBI's standards of minimal fiscal prudence.

The question which naturally springs to mind in a society in which opening a bank account requires elaborate documentation and formalities, is: How and why is it so easy to promote an NBFC? Further, why aren't the activities, balance sheets and investment portfolios of NBFCs carefully monitored by the RBI? The excuse being trotted out by RBI apologists is that the large number of NBFCs in the market makes it impossible for the apex bank to monitor their activities. But wasn't this the very institution which until very recently demanded and minutely scrutinised every foreign exchange purchase application for $100 upwards? And for several decades the number of foreign exchange applicants grossly exceeded 40,000.

Then there is the Securities and Exchange Board of India. This august institution is supposed to supervise the modus operandi of companies (such as CRB Capital Markets and CRB Mutual Funds) which are listed on the stock exchanges. Quite clearly its market intelligence unit failed to detect that CRB Capital was raising deposits from corporates offering the quid pro quo of CRB Mutual Funds purchasing their equity shares for its portfolio.

The CRB scandal has thrown light upon several other dingy corners of the nation's casually administered financial system dominated by over-manned and under-employed government institutions. The largest public sector bank, the State Bank of India gave Bhansali the facility to issue ''payable at par'' warrants at any branch. A poor centralised management information system and lack of coordination between its branches enabled Bhansali to run up a debt of Rs 570 million -- far in excess of his limit -- with the SBI.

Then there are the stock exchange authorities who permit the listing and trading of the shares of thousands of dubious companies. If their promoters abscond with investors' money the routine response is that the exchange has delisted the company.

And last but not least on the list of villains are company auditors. This tribe whose function it is to certify that companies are in good health do so in the cavalier manner reminiscent of the nation's notorious medical practitioners. And like the latter they are seldom held responsible for their acts of omission and commission.

But if all the institutions of financial governance are deficient, there has to be a fundamental infirmity in the system. And closer examination will reveal that it is rooted in the nation's notorious but seldom discussed chacha bhatija (uncle-nephew) syndrome. In a nutshell the overwhelming majority of the people in these (and other institutions of government) are appointed for every other reason than competence and character. That's why at best they function sub-optimally.

It will take a long while and a change in the national mindset for Indian society to become a meritocracy. But until this social revolution dawns, in matters of investing one's savings an individual needs to tread the path of caution and conservatism and invest only in reputed companies and institutions with long safety and solidity records. In the jungle that is the nation's financial system the watchword is caveat emptor (buyer beware)! You walk alone.