Privatising PSBs To Patronise Robber Barons? -Part1
After three rounds of mergers of 28 public sector banks (PSBs) to reduce their number to 12, the Union government is now planning to sell some of them.  The familiar cliché is that it is not the business of the government to be in business. With the non-performing assets (NPAs) going out of control, the PSBs are in a pretty bad shape.  The government has no money to strengthen their capital. Instead, if they are sold, the sale proceeds could help augment the resources of a revenue-starved government. The measure will help, it is argued, to make the banks turn around and give a push to economic activity.
 
This is based on a premise that private ownership promotes higher efficiency. Is this premise borne out by facts? 
 
A look at the conduct of a few financial titans during the recent years gives us a different story.  Advanced and emerging economies suffered heavily because of the questionable conduct of their large banks. Given below are a few instructive cases. (The facts quoted here are culled out from the reports and studies available in the public domain.)
 
How Wells Fargo ‘conned the little guy’ in America
 
Founded in 1852, the USA based Wells Fargo Bank (WFB) steered clear of the 2007-08 global financial crisis (GFC), acquired the struggling Wachovia Bank and , by the next decade, emerged, in terms of assets, as the third largest bank in the country. Several journals and consulting firms showered encomiums on the Bank’s leadership, its work culture and for being among ‘great places to work’. 
 
Yet, a decade after the GFC, the can of its worms stood exposed.  In 2019, a US Congressional committee held it accountable for customer abuses from 2002 to 2016. In January 2020, WFB entered into a settlement with the US department of justice (DOJ) to pay $3billion as fine and agreed to be monitored for the next three years after which the prosecution could be dropped. This was in addition to the fines and penalties totalling about half a billion dollars already paid by WFB till then. 
 
What were its misdemeanours? Between 2002 and 2016, WFB opened millions of customers’ accounts without their knowledge. It overcharged its borrowers, illegally took possession of cars and homes, failed to report suspected money laundering transactions and granted mortgage loans against fabricated property records. Its employees were pressurised to sell insurance policies of Prudential Insurance with which WFB had a tie-up. In the process, several malpractices, like purchasing policies without customers’ knowledge and authority, issuing and later cancelling policies and allowing them to lapse and issuing fresh policies, took place. It was reported that 70% of the policies lapsed in the first year of their being issued! All these were done to reach sales targets which in turn would fetch them incentives and bonus to the top executives.
 
During the Congressional hearing, US Senator Elizabeth Warren in her searing address to the then CEO, John Stumpf summed up the stinking saga of the Bank:
 
“You know, here’s what really gets me about this, Mr. Stumpf. If one of your tellers took a handful of $20 bills out of the cash drawer, they’d probably be looking at criminal charges for theft. They could end up in prison. But you squeezed your employees to the breaking point so they would cheat customers and you could drive up the value of your stock and put hundreds of millions of dollars in your own pocket. And when it all blew up, you kept your job, you kept your multimillion dollar bonuses, and you went on television to blame thousands of $12-an-hour employees who were just trying to meet cross-sell quotas that made you rich. This is about accountability… You should give back the money that you took while this scam was going on, and you should be criminally investigated by both the department of justice and the Securities and Exchange Commission.”
 
Warren Buffett’s Berkshire Hathaway was WFB’s largest shareholder with 7.82% shares. Mr Buffet had to face embarrassing questions from an intrepid shareholder in Berkshire Hathaway’s shareholders’ meeting held in May 2019.
 
Between 2016 and 2020, Mr Stumpf and his successor, Timothy Sloan relinquished their jobs and returned substantial part of the bonus they had received for their services. The Bank fired over 5000 employees for their acts, although they were under pressure to reach the sales targets. 
 
“Wells has come to symbolise all that is wrong with corporate America. It conned the little guy,” wrote The Economist in June 2019. 
 
Australian Banks Undermine Financial Integrity
 
Australia’s four big banks, namely, Commonwealth Bank, ANZ, National Australia Bank and Westpac control as much as 80% of the country’s financial business. In February 2019, the high-powered Australian Royal Commission on Banking (ARC), after a year-long enquiry brought out a damning report about these banks. Their conduct seriously undermined Australia’s financial system.  
 
Why were they indicted? The ARC zeroed in on the following issues:
They collected hidden fees, charged customers for non-existent services, debited charges to the accounts of the dead, gave advice to customers to invest in underperforming mutual funds, sold junk products to the poor and the mentally challenged, breached the country’s anti-money-laundering law and created mortgages on non-existent properties. Westpac, the second largest bank, had violated anti-money-laundering and counter-terrorism financing laws 23 million times during the period. Millions of customers were exploited and some financially ruined by the banks. 
 
The ARC concluded that the banks were driven by greed. Its observations are eye openers:
 
“Having lost the trust of the Australian people, we must now do whatever it takes to earn that trust back. To move from a selling culture to a service culture, there is much more work to be done in every bank. But every bank is determined to find the problems, to fix them and to pay back every penny.”
 
Royal Bank of Scotland Goes Under
 
United Kingdom’s Royal Bank of Scotland (RBS) had a history of 300 years. In 2008, it suffered an astounding loss of £24 billion and the government bailed it out by pumping in £45 billion -that was the largest corporate rescue ever.  It was a bottomless hole. In July 2020, RBS merged itself with NatWest group (earlier known as National Westminster Bank); about 18,000 employees lost their jobs.
 
Before the GFC, RBS took over National Westminster Bank, then notorious for its inefficiency. This move enabled it to become the biggest globally, although for a short while. The CEO, Sir Fred Goodwin, earned a reputation as a turnaround architect. But therein were sown the seeds of its virtual collapse.  
 
It overexposed itself to sub-prime mortgages to reach targets; treated its small customers unethically; acquired ABN Amro Bank without due diligence; the leadership was arrogant and the board failed in its fiduciary responsibility. Returns on equity became the driving force rather than building asset quality.  The internal supervisory and control systems failed to do their job. Sir Fred was stripped of his knighthood.
 
The chairman of UK’s financial services authority, which investigated the irregularities, said in his report released in December 2011:
 
“RBS’s failure in October 2008 has imposed large costs on UK citizens. To prevent collapse the government injected £45.5bn of equity capital: that stake is now worth about £20bn. But this loss is only a small part of the cost resulting from the financial crisis. The larger costs arise from the recession which resulted from that crisis, within which RBS’s failure played a significant role.”
 
Despite the government’s bailout, RBS could not turn around and, ultimately, NatWest Group, the holding company of the bank which was acquired by it, took over the sick giant in 2020 July. 
 
Deustche Bank, another ‘Lehman Brothers in the Making’?
The 150-year-old Deustche Bank (DB) is the largest bank of Germany and is among the top-10 banks globally. It has assets worth a trillion dollars, operates worldwide and had about 100,000 employees (in 2016). 
 
With all that strength, between 2009 and 2018, DB lost $14.8 billion in market value. A proposed merger of Commerzbank of Frankfurt was called off.  In 2019, it worked out a plan of restructure to resolve its financial woes. It announced closure of its equities and trading operations, cut back on investment banking and shed about 15% of its staff worldwide (including India).
 
In 2016, several financial publications and analysts warned that DB could be a new Lehman Brothers in the making and cause serious instability in the global financial market.  What led to this crisis?
 
It was accused of money laundering, triggering tax raids at its German headquarters in 2018 and had to cough up huge penalties for the offence. In 2015, it was involved in LIBOR scandals and was heavily fined by the US and the British authorities. In 2017, it entered into a $7.2 billion settlement with US DoJ for its involvement in contaminated mortgages. It had already spent more than $13 billion on litigation. 
 
Ukraine’s ‘PrivatBank’ Nationalised
 
Ukraine was part of the erstwhile USSR. After the breakup of the Soviet Union in 1991, Ukraine became independent.  As part of its transition from a controlled economy, many measures were taken by the Ukrainian government.  In the financial sector, private sector was allowed entry. The first bank to be founded was PrivatBank in 1992. Over years it grew in size, in its reach and in terms of the variety of services provided. By the second decade of this century it became the biggest private sector bank in Ukraine. It was part owned by Ihor Kolomoisky, a billionaire oligarch with huge stakes in different sectors.
 
In December 2016, PrivatBank was nationalized. The reasons: the bank’s imprudent lending policies led to loss of its capital. About 97% of its loans had gone to companies owned by the main promoters. Its failure would have caused severe economic crisis. With 20 million customers which included 3.2 million pensioners and 1.6 million socially vulnerable households, any failure of the Bank would have been disastrous. 
 
International Monetary Fund, which backed the Ukraine’s decision, commended the measure as an ‘important step towards safeguarding the country’s financial stability’.
 
(Tomorrow we will see what is the scenario in India)
 
(TR Bhat is former president of All India Bank Officers' Confederation (AIBOC). I was not President, I was a Joint General Secretary (1995-2009)
 
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    COMMENTS

    karan.kabirnagar

    2 months ago

    Excellent Article About Privatising PSBs to Patronise Robber Baron's? -part -1

    karan.kabirnagar

    2 months ago

    All the 12 Twelve State owned PSU banks should be merged. And there should be only three main State owned PSU banks. And government should raise capital of these banks make economicly strong. No state owned PSU banks should be privatised in future. Stop privatisation.

    m.prabhu.shankar

    2 months ago

    Excellent Article

    REPLY

    karan.kabirnagar

    In Reply to m.prabhu.shankar 2 months ago

    Very good

    jayaramamin

    2 months ago

    The reason for poor corporate governance/corruption is our judiciary. If we build our Judicial system, the corrupt politicians, fraudulent leaders in Govt and Corporate institutions will get punished. If there is lack of fear, then more and more crimes will get created. Our education system is also not helping...as more n more IIT/IIM/ other Top engineering/management institute students are doing frauds...Even our IAS, IPS is a big problem...What we created after independence needs a complete make over...If this is not done immediately, then good and bright students who want to live ethically will leave India. We have created a system where only crooks thrive..I have heard a famous fund manager saying many times that 90% annual reports are cooked in India...all this makes a ethical living very difficult in our country and more and more youngsters are getting into short cuts..We need to start the change from Judicial system, then education, then IAS/IPS..

    Sanjeev B

    2 months ago

    "What do you do?"
    "I work for the Mafia ... er sorry ... a Bank (insert UBS, DB, HSBC, RBS, WFB, Westpac, apna PNB, etc etc"

    The shocking part is that there is no stigma attached to these brands or to being their employees. You could be abetting crime of the highest order but still be not just socially acceptable, but socially desirable.

    This is white collar crime of the purest form.

    hamungel

    2 months ago

    Very Well-Written First Part. Waiting for the Second Part.

    karan.kabirnagar

    2 months ago

    Only the way to merged all the banks in one or two banks . Only there should be two main government Banks. Stop Privatisation of banks, because there are many example of looting the banks in, America, Australia. England in financial crisis these country Privatisation of government banks but failed and all banks were looted by private owners.

    karan.kabirnagar

    2 months ago

    Privatisation of State owned PSB banks is not a right decision of Government of India. In this way Private owner will loot the banks and left India and will go abroad and settled there. So stop the process of Privatisation.

    pradeepsaha311

    2 months ago

    In india private sector is only chor and nothing else. They will either loot shareholders, or banks or their partners and run abroad in asylum. We all want to punish PSBs because catching thief is not our motto as all of us admire chors and think why we cannot do what they did.

    Now a days unsolicited paid articles are doing round as everybody wants to loot PSBs by becoming owners rather than becoming borrower.

    aditya007374

    2 months ago

    Article written by a typical chor of PSBs.

    REPLY

    siddhartha.chatterjee

    In Reply to aditya007374 2 months ago

    Exactly. These people had their fun while making their customer's life hell. One look at how SBI branches behave if you just go to get a demand draft illustrates the matter. I am not comfortable maintaining these white elephants with my tax money, let them get sold. Some will go under and that will be for better. At least some people have to work for a living now.

    More Trouble for Mumbai International Airports as SBI Likely To Appoint Forensic Auditor
    More trouble is brewing for GVK Infrastructure and Power, including Mumbai International Airports Limited (MIAL), after the action by enforcement agencies as the lenders are in the process of appointing a forensic auditor. Top banking sources revealed that this is imminent after the PWC (PricewaterhouseCoopers) walk out.
     
    GVK Infrastructure and Power, including Mumbai International Airports Limited (MIAL) have been facing action by the enforcement agencies, CBI (central bureau of investigation) and ED (enforcement directorate) . The CBI filed a chargesheet on 27th June while ED filed its charge-sheet on 7th July.
     
    Based on RBI's (Reserve Bank of India's) PWC has recentlyDirections on Frauds, dated 1 July  2016 (updated on 3 July 2017), State Bank of India (SBI) is believed to be appointing Deloitte as the forensic auditor to check the accounts of MIAL for the past 10 years. MIAL is operating the Mumbai Airport in a joint venture with the Airports Authority of India.
     
    PriceWaterhouse Coopers has recently submitted its resignation as auditors from GVK Infrastructure and Power and GVK Airport Developers.
     
    PWC resigned as statutory auditors following the CBI and ED raids in MIAL. PWC in a letter has cited the recent events at MIAL to ascertain the appropriateness of continuing as statutory auditors in the company.
     
    PWC said in the letter to the audit committee of the companies that it is waiting for explanations and information from the company to finalise the audit for financial statement of the year ended 31 March 2020. The auditors said the company had still not provided the details which is reiterated in their resignation letter.
     
    While the crisis regarding GVK and MIAL is unfolding, there are reports that the Adani group is looking to acquire control of MIAL with a 51% stake.
     
    Adani and GVK have been locked in a legal tussle as Adani has been eyeing the Mumbai airport company. In the MIAL shareholding structure, GVK holds 50.5%, while 26% holding is with Airports Authority of India and 23.5% is with South African companies, Bidvest at 13.5% and Airports Company South Africa at 10%.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    dunbaka

    2 months ago

    GMR activities should also be probed.

    NCLT Allows SBI to Initiate Insolvency Proceedings Against Anil Ambani for Rs1,200 Crore Defaults of RCom, RTIL
    The National Company Law Tribunal (NCLT)'s Mumbai bench has allowed State Bank of India (SBI) to initiate insolvency proceedings against Anil Ambani as personal guarantor after two companies promoted by him failed to pay dues on Rs1,200 crore. This is the first insolvency proceedings against a chief of a business, who have given personal guarantee for obtaining loan.
     
    The NCLT also directed to appoint Jitender Kothari as the resolution professional (RP) in the matter. 
     
    In the order, the bench of Janab Mohammed Ajmal and Ravikumar Duraisamy says, "...while an application for corporate insolvency resolution process or liquidation proceedings of corporate debtors are pending before this authority i.e. to say during the pendency of a process of corporate insolvency resolution of the corporate debtors, an application against the personal guarantor shall have to be filed. This itself indicates that the process of corporate insolvency resolution of the corporate debtors in an application relating to insolvency resolution of a personal guarantor needs to be filed and can be prosecuted."
     
    "The law does not envisage that the insolvency resolution of the personal guarantor should follow only when the process of corporate insolvency resolution of the corporate debtor has come to an end. Therefore, the submission that this Authority should wait till the resolution of Reliance Communications Ltd (RCom) or Reliance Infratel Ltd (RITL) is successfully accomplished and the debts of the corporate debtors have been satisfied, would be eristic. It is to be remembered that the present forum is not a recovery forum and has nothing to do with the satisfaction or otherwise of the debts of the corporate debtors," it added.
     
    In 2015, Anil Ambani-promoted RCom and RITL obtained a loan of Rs565 crore and Rs635 crore, respectively from SBI. For obtaining the loan from SBI's project finance strategic business unit, Mr Ambani gave a personal guarantee that was equivalent to the total loan amount or Rs1,200 crore. The loan was disbursed in 2016. 
     
    During 2017, both RCOM and RITL committed defaults in repayment. The accounts were retrospectively declared as non-performing account (NPA) by SBI with effect from 26 August 2016 pursuant to the risk based supervision during the year 2017. 
     
    The NCLT observed that without obtaining consent from SBI, Mr Ambani provided personal guarantees for Anil Dhirubhai Ambani (ADA) group of companies, from Industrial and Commercial Bank of China Ltd, China Development Bank and Exim Bank of China. In February this year, a UK High Court judge in London directed Anil Ambani to pay within six weeks $100 million pending the trial of a debt claim brought by three Chinese banks against him personally. 
     
    In February 2012, RCom signed an agreement to borrow $925 million from these three Chinese lenders to meet its obligations under foreign currency convertible bonds that were due to mature in the March 2012. The outstanding principal plus interest as on 7 February 2020 was $708 million.
     
    The dispute, however, was not about the loan, but about the personal guarantee provided by Anil Ambani. While he had denied that he is bound by the guarantee either as a matter of actual or apparent authority, the Banks contended that Mr Ambani did provide a personal guarantee as the guarantor of the loan to RCom, which was an explicit precondition of the facility agreement.
     
    Mr Ambani also told the UK Court that he was "unable to raise any finance from external sources" - including family members. Reports that his brother Mukesh Ambani had personally paid $76 million on his behalf to Ericsson India Pvt Ltd in connection with proceedings against RCom were incorrect and misleading, Anil Ambani had claimed. 
     
    In February 2019, the Supreme Court of India had asked ADA group to pay Rs453 crore along with interest to Ericsson India within four weeks, the apex court had also imposed a fine of Rs1 crore each on three companies of ADA group (ADAG). 
     
    On failure to repay the credit extended to RCom and RITL, State Bank of India invoked the personal guarantee given by Anil Ambani. SBI issued invocation notice, and also a demand notice on 20 February 2020 to him, however, the NCLT bench noted that there was no response from the ADA group chief.
     
    SBI felt that the Chinese Banks might attempt to initiate enforcement or execution proceedings against Anil Ambani in India including attachment or restraint of his assets in India and abroad. It then filed an application before the NCLT's Mumbai bench.
     
    During the hearing, Anil Ambani contended that while the resolution plans for the corporate debtors are pending consideration, it would be prudent not to proceed against him as personal guarantor. However, the bench rejected the submission.
     
    The NCLT also passed strictures on SBI for retrospectively declaring loans as NPA. It says, "The RCOM and RITL committed default in repayment in and around January 2017. The accounts were retrospectively declared as NPA with effect from 26 August 2016 i.e. even before loan agreements had been entered into. Such retrospective declaration seems rather incongruous, akin to the adage, 'putting the cart before the horse'. While debt and default has
    remained undisputed, the incongruity of declaration of NPA, has not been raised and contested by Anil Ambani. Besides, reappraisal of the declaration of the NPA by this authority would not fall within the ambit of the provisions of the Insolvency and Bankruptcy Code (IBC), under which the instant applications have been made."
     
    Here is the order passed by the NCLT, Mumbai…
     
     
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    COMMENTS

    Sudhir Mankodi

    2 months ago

    How come a loan disbursed in the year 2016 became NPA in August 2016? Lack of due diligence? Or some vested interest of the stake holders including the bank\'s executives? Answers to these questions will never see the light of the day

    ssk.pab

    2 months ago

    Why have a go at Anil Ambani? Why not crack down on other defaulters for whom SBI wrote off debts amounting to over Rs One Lakh Crores very recently? That includes Patanjali, too, for whom not only the debt was written off, but they got additional financing to buy out Ruchi Soya!!!
    Has Anil Ambani fallen from the grace of the Govt?

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