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Madhavpura Bank gets life, conditions apply

DNAHM46783 | 8/25/2011 | Author : DNA Correspondent | WC :1431 | Business & Economy

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  • Madhavpura Bank gets life, conditions apply
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Board gets indefinite extension but RBI puts restrictions on it under Article 35 (A). This means bank can't accept new deposits but investors can hope to get back their money

Infamous for Ketan Parekh scam and several other crisis plaguing it, Madhavpura Mercantile Cooperative Bank (MMCB) has got yet another lease of life. Regulator of banks, Reserve Bank of India (RBI) has reappointed the same board at the bank to be chaired by Radha Singh, retired IAS officer and ex-secretary to government of India in department of Agriculture and Cooperation.
The board received an indefinite extension from RBI On Tuesday, the board has got indefinite extension from RBI with a motive of not leaving culprits including Ketan Parekh, free. But simultaneously, RBI has restricted the bank by imposing Article 35 A on MMCB.
By putting Article 35 A on bank, MMCB can not accept new deposits as well as the account holders can not withdraw more than Rs1,000 in six months. Hardly 100 people have invested Rs60 lakh in MMCB in last 10 years, on whom the restriction is imposed. Rest, the Article 35 A will not be barrier to bank either for revival or for reconstruction.
But by getting extension to board of MMCB, the hopes of investors getting their money back is alive again. As many as 10,400 account holders have been waiting for their Rs100 crore for past 10 years. "It is good news for investors that they can still get their money back. RBI has reappointed the same board and now the co-operative bank can once again put pressure on Ketan Parekh for recovery," said Jyotindra Mehta, chairman of Gujarat Urban Cooperative Banks Federation (GUCBF).
So far, Ketan Parekh has already paid around Rs400 crore in installments in last three years but the remaining amount of around Rs800 crore is yet to be recovered. In the Ketan Parekh scam, MMCB is supposed to recover around Rs1,200 crore which includes interest. Bank is yet to pay around Rs100 crore to around 10,400 account holders in Gujarat.
MMCB's financial status as on Mar 31, 2011
Net deficit
Negative Net worth
`1164cr (Full NPA)
Total advances
`100cr (approx)
To be paid to individual depositors
UCBs (67 banks)
Assets of the Bank
How will section 35 (A) impact the bank
The restrictions imposed by the RBI under section 35 (A) of Banking Regulation Act 1949 does not allow the bank to carry out any business. The bank can not incur any liability, can not make any advances, can not accept fresh deposits or disburse any amount even for discharge of any liabilities. The account holders are allowed to withdraw any specific amount, generally Rs1,000 once in six months. The restrictions are imposed in public interest and help the bank to improve CAR.
Banks stuck in the debacle
The Madhavpura Mercantile Cooperative Bank owes around Rs617 crore to 267 urban cooperative banks. The Reserve Bank of India (RBI) had asked the banks to make full provision against their deposits in MMCB considering it as non-performing assets. However, some of the banks have not been able to make full provision. Following are the urban cooperative banks that may have a tough time due to RBI's compulsion:  
Khedbrahma Nagrik Coop Bank
Shri Bhadaran Mercantile
Sahakari Bank
Mercantile Coop Bank, Godhra
Municipal Coop Bank, Ahmedabad
Gujarat Industrial Coop Bank
Vaso Cooperative Bank
Dakor Nagarik Sahakari Bank
Vepar Vikas Cooperative Bank, Vadodara
Surat Nagarik Sahakari Bank
Shri Mahalakshmi Mercantile Cooperative Bank, Dabhoi
Parshwanath Cooperative Bank, Ahmedabad
Rander Peoples Cooperative Bank, Surat
Jamnagar Mahila Sahakari Bank
Sardarganj Mercantile Cooperative Bank, Anand
Veraval Mercantile Cooperative Bank
Balasinor Nagarik Sahakari Bank
Kheralu Nagrik Sahakari Bank
Palanpur Peoples Cooperative Bank
Dhangadhra Peoples Cooperative Bank
Vepar Udyog Vikas Cooperative Bank
Ranuj Nagarik Sahakari Bank
Halol Mercantile Cooperative Bank
Veraval Peoples Cooperative Bank
Vardhman Sahakari Bank
Bhadaran Peoples Cooperative Bank
Kalol Urban Cooperative Bank
Positive Mercantile Cooperative Bank, Ahmedabad
Vadodara City Cooperative bank
Mandavi Mercantile Cooperative Bank
Bayad Nagarik Sahakari Bank

GUCBF hopes to  reconstruct MMCB
Till now, there was a big question of revival of Madhavpura Mercantile Cooperative Bank (MMCB) but now, with new plan, there is hope of reconstruction of the bank. The Gujarat Urban Cooperative Banks Federation (GUCBF) has suggested to shrink the balance sheet by reducing the liabilities so that other financial institution can acquire MMCB.
At present, Rs100 crore is yet to pay to 10,400 account holders and 268 co-operative banks are demanding Rs665 crore from MMCB. "The association of individual depositors has agreed to sacrifice 40% and the co-operative banks are ready to forget 50%. With this, the remaining amount can be turned into capital," said chairman of GUCBF, Jyotindra Mehta.
The whole plan of reconstruction is put to RBI and the regulator is considering, informed Mehta.
Whom to pay how much?
l Rs100 crore yet to be paid to over 10,000 account holders
l 268 co-op banks are demanding Rs665 crore from MMCB
l So far, bank has paid Rs570 crore to banks and account holders
Who owes how much
l Bank  yet to recover total principal of Rs750 cr from  defaulters
l Ketan Parkeh alone is supposed to owe Rs563 crore as principal while with interest, total rises to over Rs1,100 crore
How KP sunk MMCB
A Mumbai-based stock broker, Ketan Parkeh hails from a well-heeled share trading family. Parekh rose to fame at the same time as the worldwide dot-com boom during 1999-2000.
Ketan Parekh and associates borrowed Rs250 crore from Global Trust Bank (GTB). He also borrowed more than Rs1,000 crore from MMCB flouting RBI regulations. He relied primarily on the shares of ten companies for his dealings, which were known as the KP-10 scrips. His modus operandi was to ramp up the shares of select firms in collusion with promoters. KP-10 scrips include Global Trust Bank, Zee Telefilms, HFCL, Lupin Laboratories, Aftek Infosys and Padmini Polymer. SEBI also found prima facie evidence of price ringing in these scrips.
At the time, a group of traders known as the Bear Cartel (Shankar Sharma, Anand Rathi, Nirmal Bang) were making money from falling stock prices. Bears sell stocks at high prices and buy back at low prices. Near February-end in 2000, this cartel placed sell orders on the KP-10 stocks and crushed their inflated prices. All of Ketan's loans could not rescue his scrips. The GTB and the MMCB went bust when the money they had lent to Parekh sunk with his KP-10 stocks.
Who will be affected by MMCB’s liquidation?
Around 13,000 depositors will be the worst affected if MMCB is liquidated. The bank owes around Rs100 crore plus interest to these depositors, who had deposited more than Rs1 lakh, but have so far received only 50% of their money back. They have not received any interest for five years.
Around 267 urban co-operative banks will be affected as their Rs617 crore are at stake. Now, the UCBs are ready to give up 50% of their dues. On the other hand, the Reserve Bank of India (RBI) has asked these banks to make full provision considering their money with the MMCB as non-performing assets (NPA). Some of the banks have already complied with these norms. However, there are at least 30 UCBs in the state that would face a severe crisis if they had to make this provision.
DICGC has paid Rs400 crore to the depositors and urban co-operative banks. The DICGC is supposed to pay the depositors with an insured deposit up to Rs1 lakh when the bank faces liquidation. However, in case of MMCB, the DICGC has paid Rs400 crore, but the bank has not gone into liquidation. So the MMCB owes this amount to the insurer as well.
Moreover, Bank of India is also a victim of the pay-order scam of MMCB.
Challenges facing the bank’s revival
The board of management of The Madhavpura Mercantile Cooperative Bank (MMCB), appointed by the union ministry of agriculture and co-operative, has been trying to revive the bank. However, several attempts made for this have yielded any fruit.
The biggest challenge before the board is to recover money from Ketan Parekh and other defaulters. Parekh owes around Rs1,200 crore (including interest) to the bank. He has so far paid Rs396 crore as per the Supreme Court's direction to get bail. However, it is not likely that Parekh is ready to pay up the rest of his dues.
The bank has filed 225 criminal cases for the recovery of Rs450 crore. The bank has so far been able to recover more than Rs350 crore from various small defaulters.
The board also tried to rope in cash-rich co-operative banks to bail out MMCB. However, it failed to convince these banks, as there was no clarity over distribution of dates and assets in case the well-to-do co-operative banks form a consortium. Moreover, it was hard to convince the board of these potential lenders to give away a portion of their profit for the revival of MMCB.

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