Money & Banking
Short-changing by international banks: Lessons for the banking fraternity and regulators

Settlements and penalties of the last year have a lesson for every international bank, whether big or small, as they provide a peep into the alacrity of crimes committed by the white collar banking fraternity, predominantly in the developed world

The just concluded 2012 can be remembered as the year of banking ignominy, as a number of big international banks were involved in scandals that were beyond easy comprehension. The sheer magnitude of the penalties imposed on them by different regulators was an eye-opener for all the banks in the world. Here is a short synopsis of the major banks involved and their alleged complicity in the art of short-changing the investors and or the State, leading to their prosecution and penalty or settlement. Most of the settlements arrived at were without accepting guilt, but were agreed to with a view to stop further prosecution and investigations. But these settlements and penalties have a lesson for every international bank, whether big or small, as they provide a peep into the alacrity of crimes committed by the white collar banking fraternity, predominantly in the developed world.

Settlements agreed to and penalties levied on banks in the western world:

1. In September 2012, Bank of America agreed to pay investors a whopping $2.43 billion (equivalent of nearly Rs13,000 crore)  to settle claims from shareholders led by pension funds, who had accused it of providing misleading information about the health of Merrill Lynch, which it bought just before the 2008 financial crisis. Besides, Bank of America also paid $150 million (about Rs800 crore) to the Securities and Exchange Commission to settle a lawsuit brought against it in relation to suppression of information about big bonus payments agreed by Merrill Lynch before the merger.

2. In December 2012, Hongkong and Shanghai Banking Corporation (HSBC) agreed to pay a total of $1.9 billion (over Rs10,000 crore) to various US authorities to settle investigations into violation of US anti money-laundering regulations. The bank was alleged to have got involved in illegal transfer of billions of dollars from Iran and Mexican drug cartels to the United States.

3. The Swiss banking giant, Union Bank of Switzerland (UBS) agreed to pay a total of $1.5 billion (over Rs8,000 crore) in fines to various authorities in the US, UK and Switzerland to settle charges of manipulating London Inter-Bank Offered Rate (LIBOR) , the global benchmark interest rates over the period between 2005 and 2010. UBS had said that it would pay $1.2 billion to the US Department of Justice and the Commodity Futures Trading Commission of the US, 160 million pounds to the Financial Services Authority of the UK and 59 million Swiss francs to the Swiss Financial Market Supervisory Authority, (FINMA). This is the second bank; afterBarclays, to be charged with rigging LIBOR and investigations are still on to identify more banks involved in this scandal.

4. The Standard Chartered Bank Plc of the UK had to cough up a total penalty of $667 million (about Rs3,600 crore) in investigations by two different authorities in the US during 2012. This British bank had in August 2012 agreed to pay $340 million fine to the New York Department of Financial Services over Iranian sanctions, when the New York banking superintendent had termed this bank as a “rogue institution” that had shown contempt for banking regulations, leaving the United States vulnerable to terrorists, weapons dealers and corrupt regimes.

Again in December 2012, Standard Chartered Bank agreed to pay a fine of $327 million to the US Department of Justice to resolve allegations that it violated US sanctions against Iran, Sudan and two other countries and moved millions of dollars through the US banking system on behalf of customers in the four sanctioned countries.

5. In June 2012, ING Bank of the Netherlands agreed to pay a penalty of $619 million (over Rs3,400 crore) as per the settlement arrived at with the New York Department of Justice for allegedly falsifying the records of New York financial institutions and moving large amount of funds from Cuban and Iranian clients through New York banks, which violated economic sanctions. The US government through sanctions prohibits certain countries and entities from accessing US banking system as a safeguard against terrorist and money laundering activities, and banks violating these crucial regulations are penalized for such illegal actions.

6. In August 2012, Citigroup entered into a $590 million (about Rs 3,250 crore) settlement with shareholders in a class-action law suit that accused the bank of suppressing vital information about its dealings in toxic derivative instruments before the sub-prime crisis of 2008. Though the bank denied any wrongdoing, it said that it agreed to the settlement to avoid uncertainty in continuing with the litigation, which may be dragged on for a long time. Citibank was one of the banks bailed out by the US government at the height of the financial crisis that hit American banks and financial institutions in 2008.

7. In June 2012, Barclays Bank Plc, one of the largest banks in the UK agreed to pay a penalty of $453 million (about Rs2,500 crore) to US and UK authorities to settle allegations of rigging while fixing LIBOR, the benchmark interest rate, that caused political storm in the UK. This scandal, which cost Barclay’s CEO his job, resulted in sweeping changes in the way in which Libor is set, as LIBOR benchmark rates are used for trillion of dollars worth of loans around the world.

8. In November 2012, JP Morgan Chase & Co agreed to pay$296.9 million (about Rs1,600 crore) to settle US civil charges of misleading investors in the sale of mortgage bonds before the financial crisis of 2008. As per the Reuters report, the Securities Exchange Commission (SEC) had accused JP Morgan of materially overstating in a prospects the quality of home loans that backed a $1.8 billion residential mortgage backed securities offering that it underwrote in December 2006.

9. In similar case, along with JP Morgan, Credit Suisse, a Swiss bank, also agreed to pay$120 million (about Rs650 crore) to settle  with the Securities Exchange Commission (SEC) for the alleged negligence in the packaging and sale of risky mortgage backed securities. As per the SEC statement, the Swiss bank also misled investors by falsely claiming when it would buy back mortgage loans in two offerings in which borrowers had defaulted on their initial payments, and that “all first payment default risk” had been removed.

What does this teach the banks and regulators in India?

The first and the foremost lesson to be learnt from these episodes is that Indian banks operating in different geographies outside India should not only comply with the regulations of the home country, but also scrupulously follow and comply with the rules and regulations of the host country, where they operate, in order to ensure that they are within the ambit of laws in both the countries.

The second important step every bank operating outside India should take is to ensure that they have put in place measures to protect the banks from the reputation risks. Any laxity in safeguarding the banks’ reputation under such adverse circumstances may result in winding up the operations to the detriment of the bank’s image.  Banks all over the world function only with the trust and confidence of the depositors.

Thirdly, the Reserve Bank of India (RBI) too should play a very active role in closely monitoring the functioning of our banks outside India too. It is equally responsible for the orderly functioning of banks, both within the country and outside, so far as Indian banks are concerned.  Simply getting a certificate of compliance from the CEO of the foreign branch, as is done by some banks now, is not adequate in the face of the aggressive stance taken by the regulators in western countries. The RBI should, in its own enlightened self interest, call for a certificate of compliance of all local regulations from independent auditors in respective countries, who should be held accountable, if they fail to bring out any lacunae in the functioning of the banks concerned.

At present, a number of public and private sector banks are vying with each other to get a license from the RBI to open branches abroad. The RBI should not only be discreet and selective in its approach, but also ensure that only banks with high capital adequacy ratio and with strong and effective risk management techniques are considered for such branch expansion, to jealously guard the interest of not only the banks concerned but also the fair name of RBI, as a large number of banks are owned by the central government in our country.

As it is said, “ignorance of law is no excuse”, the RBI should ruthlessly enforce statutory and legal compliance both in domestic and overseas operations of every Indian bank and all domestic operations of foreign banks operating in India without fear or favour.

Please click here to read other stories from Gurpur.

 (The author is a banking professional and writes for Moneylife under the pen-name ‘Gurpur)


HDIL shares plunge 38% in four days; company says no financial crisis

HDIL shares nosedived after its vice-chairman and MD Sarang Wadhawan sold 5 million shares, reducing his stake to 0.99% from 2.19%, to help fund a land acquisition by the company

Mumbai: Realty player Housing Development and Infrastructure (HDIL), whose stock has plummeted nearly 38% in the past four days wiping out nearly Rs2,000 crore in market value, has said that the company is not facing any financial trouble and that it can comfortably service its debt.


“We have earlier also told the investors that we are very comfortable in our debt repayment schedule and it is as per our schedule,” HDIL vice-president for finance Hari Prakash Pandey said.


Shares of HDIL, which is primarily into re-development of projects in the city, on Thursday crashed 22%, eroding Rs905 crore from its market capital to Rs3,127 crore, as investors battered the stock after the company vice-chairman and managing director Sarang Wadhawan selling 50 lakh shares.


The scrip ended Thursday at Rs74.65, down 22.44% on the BSE after hitting an intra-day low of Rs72.55. In the past four trading sessions, it has lost nearly 38%.


On the share sale by promoters, Pandey said, “the decision to sell the stake was taken by the promoters because we needed to make an urgent payment on the same day itself to certain regulators to procure certain approvals... and we had to make the final tranche of payment to close the transaction.”


He further claimed: “It was a decision taken by the promoters to sell their stake and move ahead. It is absolutely no way reflecting the liquidity scenario of the company. We took certain decisions which have not gone down well with our shareholders, and the promoters have assured that there will not be any further sale of shares,” Pandey added.


He said the company’s debt has come down by Rs200 crore in the December quarter to Rs3,472 crore against Rs3,669 crore in the September quarter.


“As far as the overall liquidity scenario of the company is concerned, the way the Mumbai real estate market has improved in the last two quarters with better approvals, we are getting better realisation on sale of FSI. We have launched a couple of projects in the last quarter and we are looking at launching one more in this quarter,” Pandey added.


HDIL on Thursday said Wadhawan had sold 50 lakh shares for about Rs57 crore following which his stake in the company came down to 0.99% from 2.19%. The promoters had 37.36% stake as of the December quarter.


In the early noon trading on Friday, HDIL was trading 6.7% up at Rs79.65 on the BSE, while the benchmark Sensex was marginally up at 19,972.


Retailers’ cooperative: A way to take on multi-brand foreign retailers invading India

Forming a cooperative that shares a common brand name, common design for store-fronts, central purchasing of quality goods as competitively as Walmarts do, will enable existing family stores to retain their independence and ownership, and yet derive benefit of staying under a large umbrella of a professional management

Invasion of multi-national multi-brand retailers such as Walmart is now imminent since Foreign Direct Investment (FDI) in that sector is now legally encouraged by the UPA government. As it is, even today, retail outlets with foreign brands have begun to dominate the marketplace in several segments. It is clear that this will progressively cut into the standalone retailer’s market. For an increasing number of family-run small retail stores the choice would not be between growing slow or growing fast but between growing slow and closing down as their profits evaporate. It has happened everywhere in the world and Indian retailers too can't save themselves from extinction, unless they can counter it some way. In India, common people have to be innovative to fight their government to survive. Here is a solution that will help them not just to survive but to thrive!

Branded foreign retailers have tempted many such stores to ride their franchisee “Brand Wagon”. The fear of survival and the greed for a rapid growth is making them surrender their independence; their identity. Franchisee route is not possible in case of multi-brand global retailers. The only beneficiaries in this whole gamut of allowing FDI in multi-brand retail will be the foreign multi-nationals and their Indian capitalist class partners. Many retailers are however, yet holding on, with a belief that their neighbourhood goodwill will help them to fend themselves from these branded chains. Some others are simply ignoring the reality, or are too proud to bother. I however, believe that there is way for the small retailers to hold their own, and grow faster and more profitable without surrendering their identity like those who opted for branded franchisee ventures. I feel, from my own experience, that they have an alternative route.

There is no doubt that succeeding or surviving in today’s demanding economy, a lot of retail businesses need to undergo major changes in the way they do business. One finds that the store-fronts are changing and customers are sensing refreshing friendliness. Still many stores have no resources or courage to invest more. Stores are too small to grow with outside capital and borrowing money isn’t easy anymore. Besides, investing more money alone may not help them in facing competition from the big chain stores. It must be realised that more than money, most importantly, they lack advantage of bulk purchase as well as brand equity of their newly emerging competitors. Today, a name is the first act of branding that serves as a customer hook. This is today’s marketplace reality.

During the eighties, I had a pilot called MTB Plan that worked well for over hundred small-scale television manufacturers. MTB stands for Materials, Technology and Brand name—the three aspects of business that prevents small enterprises competing with big players. As chairman of ET&T Corporation, I allowed MTB member SSIs to use the ET&T brand name for their TVs. We standardised on the best and the latest TV design, and gave them access to the best, arranged central procurement of all parts in bulk, reducing their cost by 32%. As the consequence in 1987, ET&T brand 14" black and white TVs achieved over 40% of the national market share. The core of the MTB Plan involved sharing a common brand name and its shared publicity, central quality assurance and central professional materials management.

I believe that there is a scope for hundreds of speciality retailers to come together to form a co-operative venture and share, as its member owners, the benefits of a centrally managed operation driven by professionals. They will create a brand and offer a good quality product at low affordable prices for their neighbourhood buyers. See what an able and committed professional like my friend V Kurien did for the farmer cooperative in Kheda district. He took on the mighty multi-national like Nestle as well as the labour unions who opposed the cooperative. He made Amul India’s answer to multi-nationals of the world. I got many thought inputs from him.

I feel sure that forming a cooperative that shares a common brand name, common design for store-fronts, central purchasing of quality goods as competitively as Walmarts do. This will enable existing family stores to retain their independence and ownership, and yet derive benefit of staying under a large umbrella of a professional management. My proposal is ideally suited for speciality retailers like opticians, sari shops, stationery stores, drug stores, toy shops, cloth merchants, etc.

The biggest advantage of such a cooperative lies in four important areas. First, cost of setting up business will be very low, since all such stores already have low-cost space, unlike the multi-brand foreign retailers. Second, in case of shop-keeper’s cooperative, every retail outlet is owner-managed and therefore, highly motivated. Good management training will also help to develop professional administration of the store and high quality customer relationship. Third, these brand owners have huge traditional long-established and emotionally attached clientele from the locality. Fourth, such locality retailers are never competitors, if the membership is given to one store in each area. A retail stationery shop in Dadar is not a competitor to one in Mahim, nor is one in East Mulund of the one in West Mulund.

Creating brand equity of their own will start with a common name for the shops of all member retailers. Retailers normally have an emotional attachment to the store’s name—in many cases their family name. But one should realise that branding your family shop under a common name has many benefits. Understanding the objectives behind a name change is important. Unlike a franchise, under the proposed cooperative framework one can do so without risking the ownership of business and one’s independence. Under a franchise framework, one loses one’s identity along with the name. Under a cooperative format one shares the ownership of the brand. In today’s highly competitive environment, the strongest brands are those that transcend their speciality service to form an emotional connection with the customer. The key in name creation ensures that it creates a distinct identity that becomes an icon and aids the communications campaign to support the new name. One has to understand that a store’s new name is a smart opportunity to communicate a new or refreshed point of view.

A retailer’s co-operative, if professionally managed, would prevent multi-brand retailers to hurt Indian traders. It has several advantages like lower risk, highly enhanced buying power and professionally evolved strategy for running your business better. A lower risk because the umbrella cooperative shall accept most of the legal and operational risks involved in running a business, you assume less risk at the unit level, far superior buying power as a co-operative of few hundred retailers, negotiating power on products, supplies, and services increases, helping lower costs, better logistics and higher quality assurance. Finally, you have a professionally structured strategy for running your business better. Cooperative can use talented professional executives who focus on the big picture issues without getting bogged down by exhausting day-to-day administration.

The low overhead costs of the member shops, motivated proprietary management of each outlet, as against the hired management and strengths of unified purchasing, will give the cooperative an edge over the top-heavy multi-brand stores modelled over an international franchisee concept like Walmart.

Please click here to access other articles from PS Deodhar.

(PS Deodhar is founder and former chairman of the Aplab Group of companies. He is also the former chairman of the Electronics Commission of the Government of India and was an advisor to late Prime Minister Rajiv Gandhi on electronics. He also was the chairman of the Broadcast Council in 1992-93 that set in motion the privatisation of the electronic media with metro channels.)



nagesh kini

4 years ago

Kolhapur's Shetkari Sahakari Sangh and Mumbai base Apna and Sahakar Bazaar chain of shops have been in existence for long.
If only they could be depoliticized and put in the PPP mode a la Amul it would make a great deal of difference to counter the FDI in retail.


4 years ago

Excellent idea, brilliant presentation. One is reminded an old oft repeated quote “Cooperation has failed, but cooperation must succeed” or something similar sounding. This will work. The hurdles are, chances of the pilot projects being hijacked by vested interests, low literacy level and low ‘net-worth’ of small retailers in India and politicization of any initiative.

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