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A Dustup In India May Bruise Western Banks


International Finance

A DUSTUP IN INDIA MAY BRUISE WESTERN BANKS

India's banking regulators shook up foreign bankers in 1992 with charges that Citibank and three other Western banks allegedly violated securities regulations and helped provoke a crash at the Bombay stock exchange. Two years later, shock waves are still being felt. After a parliamentary committee issued a stinging report on the affair, the reformist government of Prime Minister P.V. Narasimha Rao infuriated lawmakers by criticizing their report rather than the foreign bankers. Now, a battle is brewing as opposition parties and unions boycott Parliament and stage antiforeign demonstrations.

The row is bad news for banks that had hoped the affair had been laid to rest. Citibank, Bank of America, Standard Chartered Bank, and ANZ Grindlays Bank face more stringent regulations and perhaps higher taxes. At worst, their licenses could be revoked. The shoot-out is likely to change the way foreign banks are treated in one of the hottest emerging markets in Asia.

BILLIONS SIPHONED? Until the charges were first made in 1992, the four banks were Indian success stories. Their combined net profits from 1987 to 1992 surged from $21 million to $140 million. Now, Parliament has accused them of siphoning off more than $1.3 billion worth of public monies into the country's stock market through a nexus of brokers, bankers, and government officials. According to investigators, banks used spurious IOUs to buy shares and inflate stock prices.

Parliament charges that the four foreign banks violated security-transaction laws, particularly those related to repurchase agreements and portfolio-management schemes. In 1991-92 alone, nearly $420 billion in transactions were undertaken by these banks. Several Indian banks also have been charged.

Citi denies that it was involved in creating the false financial instruments that helped lead to the market's crash. Meanwhile, the bank's Indian profits have plunged more than 40% since 1992, to less than $26 million. Citi, says one bank official, "has been having a tough time." The three other foreign banks say they will continue to cooperate with the investigation but decline comment.

Part of the furor against the banks stems from the lenient treatment they have received from the Rao administration. Despite the magnitude of the scandal, the government's central bank has proposed penalties totaling less than $40 million. "It's peanuts," fumes L.K. Nagda, treasurer of Bombay-based Maharashtra State Bank Employees Federation. The federation, a large majority cf whose members are employees of Indian banks, is launching demonstrations against foreign banks countrywide in protest against the Rao administration's measured approach. They are urging Rao to adopt Parliament's harsher recommendations, particularly the suspension of banking licenses for the implicated foreign banks.

Few expect Rao to go that far. He knows the profitability of foreign banks in India is his best testimonial for showcasing the country's economy as worthy of foreign investment. Rao also is mindful that more than half of the country's foreign exchange reserves of $21 billion are in the form of short-term deposits lodged in these banks by nonresident Indians.

Finance Ministry officials still shudder at the thought of the foreign exchange crisis of 1991, when India's reserves had depleted to a mere $800 million. Rao's free-market reforms were designed in part to pre-

vent that humiliation from recurring.

BIG SETBACK. Moreover, central-bank regulators, having exposed the scandal two years ago, are in no mood for vendettas. They propose moderate punishments, such as refusing repatriation of questionable profits, withholding approvals for opening new branches, and increasing the frequency of inspections. "Revoking licenses would be an extreme and premature step," says R. Janakiraman, chairman of the bank committee that documented scam-related irregularities. One hitch, however, could be India's independent-minded tax officials. They are said to be finalizing a package of fines that could set the foreign banks back by as much as $645 million.

There is little fear in industry and business circles that the present parliamentary tangle will topple Rao's government or derail his reforms. And the stock market has responded calmly to the current unrest. But if the opposition continues to flog foreign banks and embarrass Rao, it will have earned precious brownie points ahead of local elections in a few months. With protests moving from the halls of Parliament to city streets, tough times for foreign banks are likely to continue.Shekhar Hattangadi in Bombay


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