Attractions of bankruptcy

Over a dozen entities have lined up to take over the troubled United Western Bank. For the small, 70-year-old, Satara-based private sector bank, which has eaten up its capital, this is an extraordinary swayamvar. Commercial banks of all hues, non-banking finance companies, a co-operative bank, a stock broker and even a state government have thrown their hats in the ring. The list of suitors includes Canara Bank, Corporation Bank, Andhra Bank, Allahabad Bank, Uco Bank, Bank of Maharashtra and IDBI from the public sector; Federal Bank and ICICI Bank from the private sector; Standard Chartered and Citi among foreign banks; Indiabulls Financial Services; stock broker Pradeep Bhavnani; Saraswat Co-operative Bank and, last but not the least, the Maharashtra-HDFC-IDFC-Sicom combine. With so many takers eagerly waiting for the regulator's nod, the United Western stock which had plunged from Rs 22.60 on September 1, a day before the Reserve Bank of India (RBI) imposed the moratorium on the bank, to Rs 16.14 on September 4, bounced back to Rs 21 by September 8. Each new suitor has sent the stock price up by another notch.

The bank had reported a net loss of Rs 98.64 crore in 2004-05, and followed it up with another Rs 106.48 crore net loss in 2005-06. For the quarter ended June, its net loss was Rs 6.08 crore. Although United Western showed a capital adequacy ratio of 0.67 per cent last year, going by the RBI's internal estimate, it could now be minus 0.3 per cent. On July 31, the gross non-performing assets of the bank were 13.84 per cent (Rs 493 crore) and net NPAs 6.16 per cent (Rs 201 crore). This is against the peer group's average net NPA of 1.97 per cent.

What explains this rush to lap up a poor specimen of the banking industry? Indiabulls, a rapidly growing financial services company, wants to convert itself into a banking entity by merging United Western Bank with itself. It has valued the bank at Rs 300 crore. The Maharashtra government, on the other hand, is keen to retain the bank's Marathi ethos. It is willing to pump in Rs 210 crore to help the bank retain its regional identity and prevent a merger with bigger banks. For most of the serious bidders, the major attraction is the bank's branch network. It has 230 branches, 12 extension counters and 75 ATMs. The bulk of these branches are in the cash-rich belt of Mumbai-Thane-western Maharashtra. The location of the branches will help the prospective acquirer expand its agricultural portfolio and achieve priority sector lending targets by focusing on agriculture and small-scale industries.

Considering that fresh capital infusion of at least Rs 350 crore is required to revive the bank, the suitors are willing to spend close to Rs 1.5 crore for every single branch. Prima facie, this is too high a price as opening a new branch in semi-urban and rural pockets costs much less. So, if there is a scramble to take over the bank, it is because of the RBI's restrictive branch licensing policy. The banking regulator is never liberal in allowing foreign banks to expand their branches. Local players too are encouraged to focus on under-banked districts. The scarcity of branch licences has further been intensified with the regulator unwilling to allow some of the fast-growing banks that were involved in the demat scam to expand their branch network. For them as well as for the foreign banks, acquisition is the only route to grow their branch network, even if it means acquiring a bankrupt bank. That would suggest a problem with the branch licensing policy.