Runaway fiery

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?