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Of Sahara, peerless and the banking regulator

Of Sahara, peerless and the banking regulator
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First Published: Sun, Jul 20 2008. 11 38 PM IST

Updated: Sun, Jul 20 2008. 11 38 PM IST
India’s largest residuary non-banking company, or RNBC, Sahara India Financial Corp. Ltd last week made public its unaudited financial results. In its 21-year history, the Lucknow-based financial intermediary has not done this before.
By making its balance sheet public, Sahara possibly wants to reassure its depositors that everything is fine on the business front and their money is in safe hands.
Last month, the country’s banking regulator set a three-year sunset window on Sahara, allowing it to accept fresh deposits maturing until June 2011. Sahara will have to repay its deposits when they mature and bring down the liability to zero on or before 30 June 2015. The Reserve Bank of India, or RBI, has done this because of Sahara’s continuing alleged violation of investment norms. RBI says Sahara also did not follow rules regarding payment of prescribed minimum rate of interest to depositors, asset-liability management guidelines, “know your customers” norms for opening deposits, and failed to intimate depositors when their deposits matured.
The “fact sheet” published by Sahara says the company has capital and reserves worth Rs1,711.12 crore on 30 June. Its non-performing assets, or NPAs, are a minuscule 0.04% of its aggregate deposit liabilities. Since inception, it has redeemed deposits and interests worth Rs41,563 crore and its current deposit (and interest) liability is Rs17,513 crore.
The firm has invested Rs17,584 crore in government securities, government-guaranteed bonds, bank deposits and rated bonds and debentures of listed corporations, in accordance with RBI norms, which require an RNBC to invest 100% of its deposits in such securities. Sahara has invested its entire deposit portfolio and more in such securities.
But these numbers do not say much. This is because an RNBC’s investments are calculated with a six-month lag. So, Sahara does not need to invest its entire deposits for the quarter ending 30 June in approved securities. As long as its aggregate deposit liability of 31 December 2007 is invested in such securities, it’s fine for its June quarter balance sheet.
The Sahara “fact sheet” does not specify the dates of its aggregate deposit liability and investments. People familiar with the way the RNBC functions say it has all along been using the six-month lag to its advantage by aggressively mobilizing fresh deposits and investing new money in instruments of its choice. Now, with the restriction in deposit mobilization, Sahara will feel the heat as its deposit base will gradually come down but its investments in approved securities will continue to be calculated with a six-month lag. For instance, even if its Rs17,531 crore aggregate deposit base goes down to, say, Rs17,000 by 31 December 2008, it still will have to invest at least Rs17,531 crore in approved securities for the quarter ending in December. So, what has all along been an advantage for Sahara will turn now into a handicap.
RBI first banned Sahara from accepting public deposits in the first week of June but the Lucknow bench of the Allahabad high court stayed the order the very next day. The banking regulator swiftly moved the Supreme Court to lift the stay and was told to hear Sahara once again before arriving at a final decision. After two rounds of meetings between the central bank and Sahara executives, RBI on 17 June allowed Sahara to accept fresh deposits only with three-year maturity and repay all deposits in the next seven years.
Unlike non-banking finance companies, or NBFCs, which are required to follow many regulations in terms of raising and investing money, RNBCs enjoy too much freedom. Apart from capital adequacy ratio which does not allow an NBFC to go for unbridled asset creation without raising its capital base, these financial intermediaries also need to follow certain norms when it comes to deposit raising as well as lending to firms. For RNBCs, created by an RBI directive in 1987, the only regulatory tool is the investment norms.
The 1987 directive was a fallout of a legal battle RBI had fought with the Kolkata-based Peerless General Finance and Investment Co. Ltd, India’s oldest RNBC. Between 1987 and mid-1990s, RBI fought three times in the Supreme Court, and these cases changed the way so-called para-banks work.
First, RBI banned Peerless from accepting deposits but the company moved the Calcutta high court as well as the Supreme Court against the order. The Supreme Court allowed Peerless to continue with its business, but told RBI to take steps to “prevent exploitation of ignorant subscribers” (to Peerless’s deposit schemes). In May 1987, RBI issued its RNBC directive, asking Peerless to invest its deposits in government bonds and other securities to protect depositors’ interests. Peerless challenged this but the Supreme Court found nothing wrong in the RBI move. So, the RNBC started treating part of deposits as “processing charges” and “maintenance charges” to avoid investing its entire deposit liability in approved securities. In 1993, RBI plugged the loopholes by amending its 1987 directions. Peerless again moved the Calcutta high court and got a ruling in its favour but the Supreme Court did not find fault with the RBI norms.
Peerless took eight years to toe the RBI line, in 1995. Compared with that, the Sahara saga has ended rather fast. Or, is it too early to say that?
Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as the Mumbai bureau chief of Mint. Please email comments to bankerstrust@livemint.com
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First Published: Sun, Jul 20 2008. 11 38 PM IST