Hijacking bankers to catch swindlers won’t work, RBI needs more supervision


Reserve Bank of India headquarters in Mumbai | PTI


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Corporate chicanery appears in multiple forms and with unfailing regularity: think Enron Corp. or Wirecard AG. What bedevils capitalism in India is the propensity of some investors to cheat all other stakeholders.

In good times, “promoters” — as controlling shareholders are known in local law — puff up project costs and award contracts to related parties, draining profits away from the company. The extraordinary effort that entrepreneurs put in to beat the country’s legendary red tape provides, at least in some minds, a justification for helping themselves to an outsize share of the spoils. A highly opaque system of election financing gives politicians a stake in perpetuating the status quo.

In bad times, promoters leave creditors with hardly any value to extract from failed businesses. The biggest victim is a state-dominated banking system that recoups very little from insolvent companies. To give government-backed lenders visibility on whether their funds are being siphoned off, the central bank recently took a drastic step. Any company with 500 million rupees ($6.7 million) or more in debt will have to open a dedicated account at a bank exposed to at least 10% of its borrowings to pay creditors. Only the lender operating this escrow account can handle the firm’s day-to-day banking business. Since public-sector banks do the bulk of corporate lending, they stand to gain current accounts.

Existing banking relationships will need to be consolidated within three months. This is bound to upset the likes of Citigroup Inc., HSBC Holdings Plc and Standard Chartered Plc. These global-local, or “glocal,” banks have been beefing up their cash management platforms — and integrating them with their customers’ computer systems. The more they help businesses save money across cross-border supply chains and earn smart returns on idle balances, the bigger the current-account pile that gravitates toward them.

Citigroup alone has $900 billion-plus of such deposits worldwide. This is free funding, which takes banks years of investments in technology and customer relationships to acquire. To be asked to cede this advantage in an important market is unfair. Take Citi again. With the exception of State Bank of India, the biggest Indian lender, no government-controlled institution enjoys a deeper penetration when it comes to acting as the lead cash management bank for India’s largest companies.

The U.S. bank isn’t alone. The U.K.’s StanChart is also competitive in signing up top companies. HSBC and Singapore’s DBS Group Holdings Ltd. are the other two foreign banks with significant cash management businesses.

“The dislocation over the next few months can be unsettling for both the glocal banks and their cash-management customers,” says Gaurav Arora, Greenwich Associates’ head of Asia-Pacific.

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