Bank of Rajasthan (BoR) chief executive officer and managing director G. Padmanabhan must be a relieved man. A chief general manager at State Bank of India, the country’s largest commercial bank, Padmanabhan was chosen by the banking regulator in November to head BoR for a two-year term with a mandate to clean up the mess at the lender and address critical issues of corporate governance.

ICICI Bank Ltd is set to merge the old private bank with itself. The bank’s board is expected to clear the merger proposal next Sunday and, if the valuation report does not spring any nasty surprise, India’s largest private sector lender will offer 25 of its shares for every 118 of BoR.

Also Read | Tamal Bandyopadhyay earlier columns

Founded in May 1943 in Udaipur, Rajasthan, by the Mansingka brothers of Bhilwara with an initial capital of Rs10 lakh, Bank of Rajasthan has a chequered history.

Then finance minister of the erstwhile princely state of Mewar Rai Bahadur P.C. Chatterji was instrumental in persuading the Mansingka brothers to set up the bank and Govind Ram Seksaria, an industrialist, was its founder-chairman.

The Tayals stepped-in late in 1990s after a bitter battle with another industrial group, the Bangurs, over its control.

Pravin Kumar Tayal, the promoter, has been under pressure to give up control of BoR for quite sometime now. In February, the Reserve Bank of India (RBI) penalized the bank for a series of breaches such as “irregularities in the conduct of accounts of a corporate group" and “failure to provide certain documents sought" by it.

RBI has also ordered special audits on the bank. Deloitte Haskins and Sells and Deloitte Touche Tohmatsu were hired to audit its lending policy and information security system, respectively. In 2009, KMPG had conducted a forensic audit on Bank of Rajasthan.

India’s capital market watchdog too has not been happy with the promoters of the bank. It has banned 100 entities associated with the group from dealing in the securities market for allegedly violating many rules, including takeover norms, and engaging in fraudulent trade practices. According to the markets regulator, Tayal and his associates actually own 55.01% of the bank and not 28.61%, as has been claimed by the group.

A Securities and Exchange Board of India (Sebi) probe into share transactions in Bank of Rajasthan between June 2007 and December 2009 has revealed some startling facts. The Tayal group, a Sebi report alleges, had given funds to two other groups to buy the bank’s shares either from the market or through off-market deals and consequently, the holding of the promoters along with their “front entities" rose to 55.01% as of December 2009. It was even higher, 60%, in June 2008. In its stock market filing in December, the bank pegged the promoters’ holding at 28.61%.

Tayal vehemently denies the allegations on corporate governance. In an interview with Mint shortly after the RBI action in February, he had said: “There is no corporate governance problem. How can there be a problem if the bank is growing? The bank is strong, the books of accounts of the bank are all clean and the promoters are clean." He also said that the promoters’ holding had come down to some 28% and a road map had already been given to RBI to reduce it to 10% by 2013. Following the merger, his group will hold around 1.7% of ICICI Bank.

I am told the draft report of Deloitte Haskins and Sells has already been submitted and it has not found anything seriously wrong with the bank’s lending policies. The bank’s relatively low non-performing assets net of provisions—1.5% of loans— also makes it clear that everything is not rotten at BoR. Still, this does not give a clean chit to the promoters. This is because a promoter, particularly when he runs a manufacturing company, can use or abuse a bank in many other ways than directly using the banking channel for funding the manufacturing activities and piling up bad assets. Also, not everybody needs to go the way of Ramesh Gellii (founder of the erstwhile Global Trust Bank Ltd that had to be merged with the Oriental Bank of Commerce) and use bank money to play in the stock market.

There are ways and ways of leveraging a bank. For instance, instead of directly giving loans to his own group companies, a promoter can always have a relationship with other banks and raise loans from them. What do these banks get in return? Well, they can always get deposits at much below the market rates.

Then there can be property deals. For instance, one can lease out factory premises of group companies to the bank for its branches and offices and earn a rent that is much higher than the market rate. Similarly, his relatives can lease out their properties to the bank to be used as guest houses. The promoter can even sell properties to the bank, again at rates that are higher than what the market justifies.

Similarly, there can be considerations other than commercial viability while setting up new branches. For instance, the promoter may see the proximity of the branches to the manufacturing units as one of the guiding factors for such branch openings. This may help him use the branches for remitting money for purchase of raw material and handle the salary accounts of the employees of the manufacturing units. Finally, when a promoter also dons the mantle of chairman of the bank, he can always influence decisions on loans, transfers and other microoperational issues.

Bank of Rajasthan has not had a chairman for about three years and I do not know why the banking regulator has serious concerns about corporate governance at the bank. I am just making some points on how theoretically the promoter of a bank, who also runs some manufacturing units, can use the bank to his advantage.

Tamal Bandyopadhyay keeps a close eye on all things banking from his perch as Mint’s deputy managing editor in Mumbai. Comment at