STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

A CASE OF PARALLEL BANKING

KALIMPARK IS AN OLD BRANCH, ESTABLISHED IN 1972, SITUATED IN

AN UPCOMING, ELITE RESIDENTIAL AREA. THE BRANCH IS HEADED BY

A CHIEF MANAGER AND HE IS SUPPORTED BY ONE DY. MANAGER (ADV-

SIB), ONE DY. MGR (ACCOUNTS), CASH OFFICER, SYSTEM

ADMINISTRATOR, THREE CLERKS AND FOUR MESSENGERS. THE MAIN

BUSINESS OF THE BRANCH TILL LATELY WAS INDUSTRIAL AND TRADE

ADVANCES. AFTER THE SPIN-OFF OF INDUSTRIAL ADVANCES IN 1999

TO CNW MODULE, THIS BRANCH IS SORT OF STARVED FOR BUSINESS.

APRIL 1999

THE CHIEF MANAGER OF THE BRANCH, MR. MISHTI, IS A SENIOR

PERSON, IN HIS MID-50S. HE HAS RECENTLY CLINCHED BUSINESS

WITH A REGISTERED SOCIETY, BY NAME TALIBAN CREDIT CO-

OPERATIVE SOCIETY, FOR MASS PER SEGMENT ADVANCES BASED ON

TIE-UP WITH THE SOCIETY. THE SOCIETY IS PURPORTEDLY FORMED

BY/FOR PEOPLE OF PARTICULAR VOCATION. MR. MISHTI IS

OVERWHELMED ABOUT THE WHOLE THING. THE STIGMA OF NON-

DEVELOPMENT OF BUSINESS IN THE BRANCH HAS BEEN WORRYING MR.

MISHTI SINCE QUITE SOMETIME.

JUNE 1999

MR. MISHTI SIGNS A MEMORANDUM OF UNDERSTANDING ON BEHALF

OF THE BANK WITH THE SOCIETY. THE SALIENT FEATURES OF THE

MOU IS OUTLINED HEREUNDER:

1. THE OBJECTIVES OF THE SOCIETY IS TO ATTRACT CAPITAL

AND GRANT CREDIT TO THE MEMBERS AND DO SUCH OTHER

BANKING BUSINESS AS MAY BE CALCULATED TO PROMOTE THE

ECONOMIC BENEFIT OF THE MEMBERS.

PARALLEL BANKING
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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

2. THE BORROWERS, WHO ARE ESSENTIALLY MEMBERS OF THE

SOCIETY, SHALL BE IDENTIFIED AND RECOMMENDED FOR LOAN

BY THE SOCIETY.

3. PERSONAL LOANS OF RS.50,000/- EACH, TO BE SANCTIONED

UNILATERALLY TO THE APPLICANTS BY THE BRANCH.

4. THE LOAN AMOUNT TO BE CREDITED TO THE BORROWER’S SB

ACCOUNT.

5. THE BORROWERS’ TO GIVE A MANDATE TO THE BRANCH FOR

TRANSFER OF THE LOAN AMOUNT CREDITED TO THEIR SB

ACCOUNT, TO THE ACCOUNT OF THE SOCIETY OPENED AT THE

BRANCH FOR THIS PURPOSE.

6. THE SOCIETY WILL DISBURSE THE AMOUNT TO THE SAME

BORROWERS AT SOCIETY’S (HIGHER??) RATE OF INTEREST,

AFTER DEDUCTING SOCIETY’S PROCESSING CHARGES, ETC.

7. RECOVERY OF THE LOANS FROM THE BORROWERS IS THE

LIBERTY OF THE SOCIETY. MEMBERS WOULD PAY THE SOCIETY

AND IN TURN THE SOCIETY WOULD REPAY TO THE BANK.

8. THE SOCIETY WILL MAKE CONSOLIDATED CHEQUE PAYMENT TO

THE BRANCH TOWARDS REPAYMENT, EVERY MONTH.

THE MOU IS SIGNED BY THE C.M. ON BEHALF OF THE BANK AND

THE SOCIETY SECRETARY AND PRESIDENT.

THE PROCESS OF LENDING (RATHER PARALLEL BANKING??) STARTS

WITH EUPHORIA. ABOUT 50 LOANS PER WEEK IS TO BE

DISBURSED WITHIN THE FRAMEWORK OF THE MOU. THERE IS NO

RECOMMENDATION FOR SANCTION BY ANY OFFICIAL AT THE

BRANCH AS THERE IS NO FIELD OFFICER FOR PER SEGMENT

ADVANCES. ALL LOANS ARE RECOMMENDED BY THE SOCIETY AND

PARALLEL BANKING
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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

SANCTIONED BY THE C.M. OF THE BRANCH. ALL VOUCHERS FOR

DEBIT TO THE LOAN ACCOUNT AND DEBIT TO SB ACCOUNT IS

PASSED BY HIM ALONE. A START-UP PERIOD OF TWO MONTHS IS

GIVEN. DOCUMENTS ARE EXECUTED IN THE PREMISES OF THE

SOCIETY. CONTROL FORMS ARE SENT IN BUNCHES OF 50 AND

100 AFTER CONSIDERABLE ELAPSE OF TIME.

AS AND WHEN THE OLD ACCOUNTS FALL DUE FOR REPAYMENT,

THE REPAYMENTS ARE MADE BY THE SOCIETY OUT OF

DISBURSEMENTS OF NEW LOANS.

JULY 1999 TO FEB 2000

THE HYPED LENDING CONTINUES TO TOUCH 651 ACCOUNTS WITH

OUTSTANDING OF RS 3.65 CRORES.

THE AGM VISITS THE BRANCH ON 3.10.1999 AND IN FEB 2000

AND OBSERVES THAT BUSINESS HAS SWELLED BEYOND

EXPECTATIONS AND OBSERVES THE SAME IN HIS VISIT BOOK.

LATER ON HE SENDS HIS CM (CSC) FOR A HEALTH CHECK. THE CM

(CSC) REPORTS THAT REPAYMENTS ARE REGULAR AND ACCOUNTS

ARE CONDUCTED WELL. HE ALSO INCIDENTALLY POINTS OUT

THAT THE MOU IS NOT APPROVED BY CONTROLLERS. BY THIS

TIME THE CM (CSC) HAD APPLIED FOR NORMAL V.R.S. AND

RETIRED IN FEB 2000. ON THE LAST DAY OF HIS RETIREMENT HE

SIGNS AT THE INSTANCE OF THE AGM 299 CONTROL FORMS OF

THE ABOVE LOANS ON WHICH HE HAD RAISED QUERIES AND

REPLY NOT RECEIVED FROM THE BRANCH. THEREAFTER THE AGM,

IS PROMOTED AND BEFORE HIS RELIEF, HE WRITES 4 TO 5

LETTERS TO THE BRANCH TO IDENTIFY EACH AND EVERY

BORROWER AND CONFIRM THAT THEY HAVE RECEIVED THE LOAN

PARALLEL BANKING
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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

AMOUNT AND THAT THEY WILL BE REPAYING THE LOAN

REGULARLY. IN THE MEANTIME, THE BRANCH C.M. MR. MISHTI

IS TRANSFERRED TO Z.O. AS CM (GB) OF ANOTHER REGION. THE

PROMOTED AGM IS RELIEVED AND THE NEW AGM REPORTS AND

WITHIN 4-5 MONTHS HE IS ALSO PROMOTED AND TRANSFERRED.

OCT. 2000 AND NOV 2000

THE NEXT AGM INCUMBENT, WHO TOOK OVER IN OCT. 2000

VISITS THE BRANCH IN NOV 2000 AND OBSERVES THAT MANY

ACCOUNTS UNDER THE CATEGORY ARE IRREGULAR. HE REMARKS

SUITABLY AND INSTRUCTS NEW THE C.M. OF THE BRANCH MR.

GAJENDRA TO REGULARISE THE ACCOUNTS IMMEDIATELY. IN

THE MEANTIME, THE BANK ANNOUNCES THE SBI VRS PACKAGE

AND AMONGST OTHERS, MR. MISHTI IS ALSO A SBI V.R.S.

OPTEE.

FEB 2001

THE V.R.S. APPLICATION OF MR. MISHTI IS ACCEPTED ALONG

WITH THAT OF THE REGIONS’ CM (GB), CM (CSC), MGR (NPA) AND

DY. MGR (STAFF). THEY ARE ALL EXCITED AND ARE CALCULATING

THE HANDSOME TERMINAL BENEFITS EACH ONE IS GOING TO

GET.

IN THE MEANTIME, SOME ACCOUNTS HAD BECOME NPA.

DISCOMFORT AND ANXIETY IS REINING THE ATMOSPHERE OF THE

BRANCH. MR. GAJENDRA DID NOT BRING THIS TO THE NOTICE

OF THE AGM.

NOW FOR MR. GAJENDRA, ANNUAL CLOSING IS NOT A PLEASANT

EXERCISE. THERE IS AN UNEASY CALM IN THE BRANCH.

NEVERTHELESS, ALL THESE 651 ACCOUNTS OF RS 3.65 CRORES

PARALLEL BANKING
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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

ARE TREATED AS STANDARD ASSETS, DESPITE

INSTALMENTS/INTEREST BEING OVERDUE FOR MORE THAN 6

MONTHS. THE BRANCH IS DRAWING COMFORT FROM THE

ASSURANCE OF THE SOCIETY THAT RS. 28 LAKHS WILL BE PAID

TO REGULARISE ALL THE NPA ACCOUNTS BY FIRST WEEK OF APR.

2001.

ON 31.3.2001, MR. MISHTI HAPPILY PROCEEDS ON V.R.S ALONG

WITH OTHERS.

APRIL 2001

MR. GAJENDRA, THE C.M., IS HASSLED AND IS BATTLING WITH

THE STATUTORY AUDITOR SAYING THAT THE SOCIETY WOULD

PAY RS. 28 LAKHS AND THAT ALL THE ACCOUNTS ARE ONLY

TEMPORARILY IRREGULAR. THE STATUTORY AUDITOR ASSERTS

THAT IF THE STATED AMOUNT IS PAID TOWARDS THE OVERDUES

OF THE NPA ACCOUNTS, THEN ONLY HE WOULD AGREE TO THE

CLASSIFICATION. THE STATUTORY AUDITOR REPORTS TO THE

AGM OF THE REGION. THE AGM, IN TURN, REPORTS TO THE DGM,

GM AND THE CGM AND VISITS THE OFFICE BEARERS OF THE

SOCIETY ALONG WITH THE DGM (MODULE). THE SOCIETY ALSO

ASSURES THAT THE FUNDS WOULD BE ARRANGED. NOTHING

HAPPENS BEFORE THE STATUTORY AUDITOR COULD LEAVE. ALL

THE ACCOUNTS WITH OUTSTANDINGS OF RS 3.5 CRORES BECOME

NPA! ! ! ! ! THE AGM OF THE REGION, ODERS AN ENQUIRY.

MAY 2001

REPAYMENTS HAD COMPLETELY CEASED. THE LFAR MADE A REMARK

ON THE CONDITION OF THE ACCOUNTS AND A MOC WAS MADE

FOR RE-CLASSIFICATION.

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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

THE NEW CM (CSC) WHO REPORTED IN MAY 2001, CONDUCTS THE

ENQUIRY AND OPINES THAT DETAILED ENQUIRY INTO EACH AND

EVERY BORROWER IS NEEDED. HE FINDS THAT THE BORROWERS

ARE FROM 120 SCHOOLS SPREAD OVER 150 KM. RADIUS.

AFTER JULY 2001

THE SITUATION HAS BECOME DELICATE AND STICKY. L.H.O.

ORDERS A PROBE AND A SCALE-III OFFICER IS DEPUTED. HE

TOOK 2 MONTHS FOR THIS EXERCISE. HE TRIED TO CONTACT

EACH AND EVERY BORROWER AND BROUGHT OUT THE FACT THAT

IN CASE OF 208 ACCOUNTS THE BORROWERS WERE BOGUS/NON-

EXISTENT. THE DOCUMENTS WERE TAMPERED/ FORGED. THERE

WAS IMPERSONATION. HE ALSO BROUGHT OUT THE FACT THAT

MANY GENUINE BORROWERS HAD PAID THE MONEY TO THE

SOCIETY WHICH WAS SWINDLED BY THE SOCIETY. IN AUG 2001,

SRI. GAJENDRA WAS TRANSFERRED AS CIRCLE AUDITOR AND MR.

MADAN, MANAGER JUST RETURNED FROM C.O. (I & A) DEPT WAS

POSTED AS B.M.

THE CASE WAS FULLY BLOWN. A COMPLAINT WAS LODGED WITH

REGISTRAR OF SOCIETIES WHO CALLED FOR A JOINT MEETING

OF THE BANK AND THE SOCIETY. HE ADVISED FOR A JOINT

RECOVERY DRIVE WHICH WAS ATTEMPTED BUT FAILED.

ALL THE ACCOUNTS INCLUDING THE 208 FRAUD ACCOUNTS WERE

TRANSFERRED TO PB. THE TOTAL WAS A WHOPPING RS. 3.65

CRORES. CASES WERE FILED AGAINST ALL BORROWERS, NON-

FRAUD ACCOUNTS WERE WRITTEN-OFF & PARKED IN AUCA. THE

BRANCH HAS INCURRED LEGAL EXPENSES OF RS. 45 LACS IN THE

PARALLEL BANKING
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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

MELEE, WHICH THREATENED TO TURN THE BRANCH INTO A LOSS-

MAKING BRANCH.

THE REPUTATION OF THE BRANCH IS TARNISHED. THE MORALE

OF THE STAFF HAS DIMINISHED. THE BRANCH IS BACK TO

SQUARE-ONE WITH A BLEMISH.

POINTS FOR DISCUSSION

1. IN THIS CASE, WHAT ARE THE LAPSES THAT YOU OBSERVE ON

THE PART OF THE BRANCH STAFF AND THE CONTROLLERS?

2. CAN THE TREND BE REVERSED NOW? IF SO, HOW? STATE

SPECIFIC STRATEGIES.

3. WHAT ABOUT THE MOU SIGNED BY THE C.M. ON BEHALF OF

THE BANK? IS IT WITHIN THE FRAMEWORK OF THE BANK’S

LENDING POLICY?

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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

CASE-STUDY PREPARED BY: MRS. S. VIJAYA,CHIEF MANAGER (TRG)

POTENTIALS OF THE CASE:

This is real life case. The case highlights the utter disregard to Bank’s
lending philosophy which lays down the cardinal principles of lending
based on risk perception of the banker and without
interference/involvement of middle-men.
Powers and responsibilities of Branch officials
In accordance with the instructions issued by LHOs, all officers

of the Bank must exercise due diligence and a wise discretion in

the use of the powers delegated to them, and must satisfy

themselves that all advances granted by them are for genuine

business, trade or industrial requirements or as per schematic

lending in true spirit and letter of the scheme.

The MOU signed by the C.M. on behalf of the Bank tantamounts to

lending to the Society to circumvent the Bank’s Lending philosophy.

In this case, apparently, parallel banking is legalized and propagated.

The case also brings out the by-stander attitude of other staff

functionaries at the Branch and the Controllers, which enables the

perpetrator to accomplish and proliferate the wrong-doing, undeterred

and unabated. To think of a situation where identification of borrower,

documentation, collecting proceeds of the loan, recovery thereof and

other essential aspects of lending has been delegated (rather relegated)

to an outsider is abhorring. The MOU signed on behalf of the Bank

enumerating all these without sanctity is abominable.

PARALLEL BANKING
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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

FAUX PAS BY THE C.M.

1. Personal Loans Scheme is a schematic lending where end-use of Funds

need not be ensured by the Bank. Yes, but does that absolve the

Banker of the responsibility of observance of Basic Lending Philosophy

which include proper identification of beneficiary, recovery,

confirmation of source of funds for repayment etc???

2. Signing an MOU which is not legally whetted and approved by the

controllers on behalf of the Bank, which bears several unethical

clauses, is totally unprofessional.

3. Not only encouraging, but being a party to the “Parallel Banking”

started by the Society is ridiculous.

4. Conceding the recovery function which is the life-blood of a Banker,

to an outsider is height of complacency.

5. Knowing fully the facts, that the repayment of earlier loans are

being made by the Society from fresh disbursements and if we still

continue to sanction new loans, then we are getting into a

irredeemable loop.

6. Documentation, verification of income sources and antecedents of the

borrower has been given a go-by.

7. Control forms have not been sent or sent with delay in bunches.

8. Controllers were not advised of the real facts either by the Branch

C.M. who sanctioned the loans or the next incumbent.

PARALLEL BANKING
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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

FAUX PAS BY THE CONTROLLERS

1. The Control Forms are not scrutinized properly. The sanction of

similar amounts to different borrowers who are not within the

Branch jurisdiction is uncommon and had to be enquired upon.

2. Delay in submitting the control form by the Branch had not

alerted the Controllers.

3. Mass sanctions of loans needs prior administrative clearance from

the higher-ups.

4. The signing of MOU which is not approved by the Bank is a grave

lapse. This aspect has been neglected.

5. The SUPERVISION function by the Controllers is to

a. To ensure that effective follow-up is maintained and to pick

up warning signals of “insipient sickness”.

6. The MONITORING FUNCTION by the Controllers is to

a. Ensure effective supervision and responses for early warning

signals.

b. Monitor on an on-going basis by tracking changes from time

to time.

c. Specific actions to ensure high percentage of standard

assets.

d. Having queried the Control Forms, there was no necessity

for the CM (CSC) of the Region to sign 299 Control Forms

on the day of his retirement, that too when reply to queries

were not received.

All these apparently have not been effectively carried out.

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 STATE BANK OF INDIA, STAFF TRAINING CENTRE, BANGALORE

Strategies for Redemption of the Branch

1. The concerted effort of each and every member of staff and active

support of Controllers is required at this stage because the Branch is

right now in the midst of turbulence and at this stage extra effort is

a must.

2. Recovery of loans parked in AUCA.

3. Take over of Quality large Advances from other Banks.

4. Sanction of good quality Personal Segment Advances.

5. Take up advances for Housing Projects to reputed builders which can

be later converted to individual Housing Loans.

6. Canvass for Miscellaneous Business and cross-selling of our Subsidiary

products such as Credit Cards, Life Insurance, Mutual Funds etc

which could generate fee based income and agency commission.

PARALLEL BANKING
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