the fall of united western bank

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Reserve Bank of India-RBIy Established in 1935, RBI is the central bank that regulates

and supervises the financial system in India.y It is the banker to the Government and all scheduled banks

in the country.y Its important functions are to prescribe broad parameters

of banking operations within which Indias banking and financial system functions.

UWBL-Backgroundy United Western Bank Ltd (UWBL) was founded by Waman Ganesh

Chirmule in 1936.y It started its operations on march 08, 1937. y In the year 1951, UWBL was declared as a Scheduled Bank.

Scheduled bank means a bank included in the Second Schedule of the Reserve Bank of India Act, 1934.y In 1956, the Union Bank of Kolhapur was merged with UWBL

followed by merger of Satara Swadeshi Commercial Bank Limited too in 1961, UWBL obtained the status of a B class bank and was upgraded to A class (Based on CAMELS) in 1974.

CAMELS Ratingy CAMELS ratings on scale of 1-5. A corresponding to 1

being the best rating.C

Capital Adequacy Asset Quality Management Earnings Liquidity Sensitivity to Market Risk






Contdy Over the decades, UWBL became one of the most

preferred private sector commercial banks in western India.y It had a vision of being A technology savvy, customer

centric progressive bank with a national presence, driven by the highest standards corporate governance and guided by sound ethical values.y UVBL offered diversified products like automobiles

finance, housing finance, corporate finance, export finance, finance for education, finance to SMEs, etc.

Contdy In the financial year 1996, the net worth of UWBL crossed

the Rs.100crores.y In 1997 opened first ATM in Satara. y By 2006, the bank had 230 branches, 12 extension

counters and 75 ATMs spread over nine Indian states that were controlled by five zonal offices at Mumbai, Pune, Kolhapur, Jalgaon and Nagpur.

UWBL Organization Structurey 3- Tier architectureHead OfficeSatara

Zonal Offices







.230 branches..

The Makharia Groupy The Company under the aegis of Maliram Makharia

Group was incorporated in 1982 as Maliram Makharia Textile Mills Pvt. Ltd.y Subsequently, the name was changed to Emtex

Industries (India) Ltd. to reflect the related expansion and diversification activities under one single corporate roof.y Further info on

Failure of UWBLy In general, one can say it was inefficient management of

the bank. In the last two years, huge losses were made, leading to erosion of the net worth and negative capital adequacy ratio.-Anand Sinha,Executive Director, RBI.

y I dont accept that the bank has failed. We have

consolidated.We did not have the capital but if we were given more time we would have raised it. -Satish Marathe, CEO, United Western Bank.

The Problemy There were several problems that led to the fall of UWBL that once had reached the A class bank category. y Irregular transactions with some of its major shareholders specifically Makharia Group Companies (MGC) y Conflicts between its major shareholders regarding the ownership of the bank , poor governance and inefficient management of capital were the main reasons for its collapse. y Increase in Non Performing Assets(NPA) and fall in CAR.

Transactions with the Makharia groupy The Makharia family owned Emtex Industries was given overdraft facility of Rs. 68.8 million to subscribe to the 1995 rights issue of the UWBL bank. y Also, a letter of credit(LC) was sanctioned to MGC by UWBL y RBI felt that the LC facility was provided with the intention of preventing MGC s loan account with UWBL from becoming non-performing assets (NPAs) y On May 30, 1998, UWBL was penalized for Rs. 1 million by the RBI for irregular transactions with the MGC.

Transactions with the Makharia group contdy In the year 2000, UWBL filed a petition in the Mumbai High Court against Emtex for defaulting on loan repayment. As of late 2006, Emtex owed Rs. 499.1 million to UWBL and this was classified as doubtful assets by the bank. y In another transaction in the year 2003, UWBL entered into a settlement with Maliram Makharia Stockbrokers Private Limited (MMSPL), a brokerage house under MGC to pay back Rs. 57.5 million, on account of a loan that was earlier given to MMSPL. However, as of August 02, 2006, UWBL had not received any loan installment from the firm.

Transactions with the Makharia groupUWBL

RBIShareholding of

Makharia increasesOD facility + LC

UWBL Rights issue MGC

Makharias Outstanding

The Ownership Issuey In Aug 2000, infighting broke out for a controlling stake in UWBL y y y y

between the banks main shareholders i.e State Industrial and Investment Corporation of Maharashtra Limited (SICOM) and the Makharia family. SICOM & MGC they held a 24% equity stake in UWBL out of which MGC held a 14.5%bstake. Each of the shareholders wanted four representatives on UWBLs board. On the other hand, nine professional directors of the UWBL board strongly opposed the idea. The management board of UWBL sought RBIs intervention to seize the voting rights of the MGC as they did not have the regulators' approval for holding a more than 5% equity stake in UWBL.

The Ownership Issue Contdy In order to overcome the takeover threat from the Makharias, the

management board of UWBL granted about Rs. 200 million as an interest free loan to the bank's employee equity trust to purchase around 24,32,000 shares (8.41 % of the bank's capital), from the secondary market. However, when UWBL applied to RBI for approval, RBI sanctioned only Rs 60 million for this purpose. But even without the approval, UWBL s management went ahead and sanctioned Rs. 200 million. For this violation, RBI imposed a penalty of Rs. 5,00,000 on UWBL on May 29, 2001. The central bank also ordered UWBL to recall the entire loan amount granted to the employee equity trust by sale of shares. UWBL was asked to make provision in its balance sheet against the expected loss for the loan amount for financial year 2000-01, based on the market price of the shares. Though the management board argued that the sanction of the loan was in conformity with the provisions of Section 77 (2) (b) of the Companies Act, 1956, RBI was not satisfied with the explanation.

The Other Problemsy In the year 1999, Resolutions were passed to increase the

authorized capital of the bank from Rs. 500 million to Rs. 1 billion at the general meeting held on August 07, 2000. The management board of UWBL proposed to issue 1:5 bonus and 1:2 rights shares y From June 2001 onwards, UWBL was placed under monthly monitoring by the RBI due to its poor financials and rising NPAs.FY 2000-01 2004-05 Loss 156.8 million 986.4 million NPA 3 billion 4.5 billion


UWBL-Asset-Liability Mismatch Details(2005-06)y In the annual inspection report for the year 2005, RBI

noted deficiencies in the asset-liability management of UWBL. By March 31, 2006, the maturing liabilities for short term deposits (3-6 months) were more than assets by Rs. 318.80 million whereas the same for the long-term deposits (1-5 years) exceeded assets by Rs. 13.2595 billion. This huge asset-liability mismatch adversely affected the liquidity position of the bank

UWBL-Asset-Liability Mismatch Details(2005-06) Contd(Rs. in crore)

Steps Takeny About 17 commercial banks including ICICI Bank,

Canara Bank, Federal Bank, Andhra Bank, Standard Chartered Bank, Allahabad Bank and others expressed their interest in acquiring UWBL. y September 13, 2006, RBI announced that UWBL would merge with IDBI. The amalgamation came into force on October 3, 2006. y IDBI announced that the financial performance of UWBL would be merged with the financial performance of IDBI in the third quarter of the financial year 2006-07.

Steps Taken Contdy RBI conducted an informal bidding process by stressing certain key

conditions. One of the conditions was protection of all depositors (i.e. ensuring repayment of all deposits) without any help from the Deposit Insurance and Credit Guarantee Corporation (DICGC). IDBI offered a premium of over 31% on the market value of the UWBL shares. RBI was also concerned about the future of 3,000 UWBL employees and made sure that their jobs were secure. IDBI retained all the employees with the existing compensation package and other benefits as offered by UWBL. y The board of UWBL forwarded a restructuring plan in which investors such as SICOM, HDFC and IDFC together offered to invest around Rs. 3.5 billion in the bank. However, RBI turned down the proposal as it felt it was too late to consider such a proposal.

Impact of merger on IDBI Banky Analysts felt amalgamation would support growth of

IDBI. y Merger expected to diversify IDBI s credit portfolio. y Other advantage analysts felt that merger would consolidate IDBI s financial position. y Challenges regarding integration of technology and people.

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