labels: corporate finance, bank general, icici bank, investment - general
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What actually went wrong
20 April 2003

What actually went wrong with ICICI Bank, which had to face large-scale withdrawals recently? Uday Chatterjee tries to unravel the mystery

Mumbai: ICICI Bank has been in news lately for an unfortunate crisis (See ). What's all these hullabaloo about? And how did India's largest private sector bank get into a murky situation like this? Let's probe.

The key yardstick on the basis of which a bank functions is public confidence. A depositor who has surplus money would prefer to put this money in a bank rather than let the money lay idle. Here, the first criterion he will look at is whether his money is safe and after that, the interest or returns he will get from that money. If he perceives that his money is not safe, he will not put his money or withdraw his money if it is already placed with the bank.

Large-scale withdrawals of such deposits lead to a run on the bank. That's what happened, a few days back, to the venerated ICICI Bank. Given the huge size of the bank, one can say it was a mini run, but a run nevertheless. Enough reasons for ICICI Bank as well as other scheduled commercial banks to take the matter seriously.

The issues involved
For the Indian banking customer, runs are nothing new. Over the last few years we have seen cooperative banks closing down every other day. However, the reasons why cooperative banks are falling are far different from what happened in the ICICI Bank's case.

Cooperative banks, as we all know, are structurally weak and are controlled by dual regularity authorities. These make the control of the banks difficult. Besides, these banks are not professionally managed and cases are plenty where loans are given to directors and their family members.

This is not the case with ICICI Bank, which is professionally run, managed and observes the various prudential norms stipulated by the Reserve Bank of India (RBI). (See ). So what went wrong?

It is too early to come to conclusions, and the bank has appointed P N Bhagwati, retired chief justice of the Supreme Court, to conduct an enquiry. The full story will come out on completion of the enquiry, but a look at the sequence of events and at the present-day banking scenario may provide some clues.

In the second week of April 2003, Infosys and a few other IT companies declared their annual results. While the results were good the outlook for the next year was not very encouraging. This led to a crash in the stock market and the value of Infosys and other IT stocks fell substantially with crores of rupees evaporating into market capitalisation.

Rumour trouble
A local Gujarati newspaper carried a story on 11 April, a Friday, that ICICI Bank had huge exposure to these stocks and is likely to go bankrupt.

Nothing was further from the truth but the rumour and panic spread like wild fire. Panic withdrawals first began in the small town of Surat and the withdrawal frenzy spread to Rajkot, Ahmedabad and soon to nearly all the towns in the state. On that particular Friday, crowds were seen withdrawing from the bank's ATM centres till early in the morning.

The next day, similar scenes were seen the bank's ATM centres in Maharashtra, too. There were a string of bank holidays to follow, which also saw people rush to the ATM centres. The RBI and other banks joined in to stem the tide. The apex bank issued a public statement assuring the public that their deposits with ICICI Bank are safe and that the bank is in a position to repay all its liabilities.

Other banks also helped in supplying cash to the centres where withdrawals were taking place. By Tuesday (15 April), the panic subsided and things were normal again. The total amount withdrawn during this period was about Rs 200 crore - a small amount considering the bank's asset base, but big enough to leave the bank shaken and stirred.

The bank's expansion and growth strategy in the retail segment has been ATM-driven. Through ATMs, banks can offer their customers multiple products and bring down transaction costs at the same time. However, the problem with ATMs is that the amount of cash that can be stored at one point of time is limited, unlike in the case of a currency chest of a bank. Thus, catering to the withdrawing public in Gujarat and Maharashtra also became a logistical problem.

This was also pinpointed by the credit rating agency Crisil which in a statement said: "This incident highlights the issues all banks face under these circumstances, including timely availability of system support, operational issues of cash management with large ATM networks and the need for banks to maintain various sources of liquidity." (See ). Sure, but what about the public confidence which the bank seemed to have lost temporarily?

A pragmatic approach needed
Banking today has changed considerably from the eighties and the early nineties. During those days, banks' profits came from giving loans to the manufacturing industry. The decline in manufacturing led banks to look at other avenues and retail lending became the order of the day. A home loan, for instance, is today seen as an ideal banking product. Home loan borrowers generally repay their loans, as they do not want to lose out on their assets. Therefore, it is safe and profitable.

The problem, however, is that such products are volume-driven. A bank can lend Rs 100 crore to a Tata group company in a single day but if it has to lend Rs 100 crore in the home loan segment, it has to find about 1,000 crore borrowers. This situation leads to aggressive marketing as we see in the form of home loan melas, exhibitions, on-the-spot sanctions and the like.

Without doubt, financial services products need to be marketed and sold. But you don't sell a home loan as if it is bottle of Coca-Cola. A Coke is after all a Re 5 thing and impulse sale of a cola does not hurts anyone's pocket. A home loan, on the other hand, is a Rs 5-lakh thing spread over a period of 10 years. Here, one needs to examine in depth the borrowers' asset carrying and debt servicing capabilities, and one wonders whether that is being done properly today.

In the end, one has to say that the age-old and staid principles of banking are more relevant in the era of retail financing. A young and highly qualified banker tipped to be going places had once remarked: "The best banker is essentially a dull and boring banker." Words worthy of note.


also see : ICICI Bank withdrawals bypass normal level by Rs 150 crore
A crisis tale and two banks: Global Trust Bank, ICICI Bank
Post-withdrawal, Crisil reaffirms ICICI Bank's outstanding ratings

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