Bullion scam -- banks violate norms with impunity

Bullion scam -- banks violate norms with impunity
SURESH P IYENGAR

MUMBAI, MAR 25: Nationalised banks led by State Bank of India seem to have openly flouted internal norms and prudential lending lending practices while dealing with cooperative banks. The Rs 70-crore bullion scam surfaced asfter SBI and other banks involved (Bank of India, Standard Chartered and Punjab National Bank) went overboard in helping their clients by accepting the pay orders of cooperative banks not backed by sufficient money.

The payorder-backed bullion game in Ahmedabad has been going on since the mid-90's, more so after the liberalisation of gold imports. Bullion trade had by then shifted to Gujarat which has nil sales tax and no octroi duty against Maharashtra's 2 per cent octroi and 10 per cent sales tax (which the Mumbai bullion traders are still pleading for their removal).

In views of the sheer volume and attendant risk, main bullion banks in Ahmedabad had refused to accept cash for bullion purchases. Instead, these banks said they would accept pay orders of other banks which were willing to accept cash. The cooperative banks - short of the mainline banking business - also gladily accepted this pratice. "The Reserve Bank of India also did not act till the scam surfaced. The RBI could have intervened earlier and stopped the pay order business in gold trade," said a banker.

He said that gold dealer Choksi and his associate firm, Archana Exim, had accounts with Classic Co-operative Bank since a long time. However, as Choksi and his associate firm were considered `high-value' customers by Classic, they were extended certain additional benefits.

Classic, in its zeal to retain such clients, issued bankers' cheques and pay-orders for them during the period of March 9-15 against cheques of other banks. With these cheques bouncing back due to non-availability of funds in current accounts of these gold dealers, Classic, too, faced a funds crunch and could not honour the bankers' cheques and pay-orders it had issued.

In Ahmedabad's Manek Chawk (bullion bazaar) there are five cooperative banks in a vicinity of some 500 yards, competing with each other, in addition to the RBI-cleared bullion banks. While representatives of the Gitanjali group - the leader in the business - say they simply do not have any dealings with cooperative banks, KL Choksi (another leading figure in bullion trade) is understood to have accounts in all the five cooperative banks, in addition to the main bullion banks. He had friends in all these banks, and as is the norm everywhere, it is the personal touch which helps smoothen the moolah game.

Banks had been gladly accepting the pay orders offered by Choksi and probably Gitanjali also for their regular bullion purchases. Undoubtedly, both these operators seem to be too sharp in handling their bullion business - KL Choksi was the biggest client of Gitanjali - and have been timing their purchases well from the bullion banks. This coupled with their bulk purchases of gold had helped them get better deals and treatment from bullion banks.

The RBI has estimated the losses of banks due to default in the bullion market at Rs 69.60 crore. Of this, State Bank of India (SBI) has suffered a loss of Rs 41 crore; Bank of India (BoI) about Rs 5 crore; Punjab National Bank (PNB) nearly Rs 7 crore, and StanChart Bank to the tune of Rs 16.60 crore.

Classic Co-operative Bank, which was licensed in December 1997 and began operations in February 1998, mainly had jewellers and gold dealers as its customers. It has a balance-sheet worth Rs 50 crore, deposits to the tune of Rs 18 crore but a net worth of only Rs 5 crore.

The cooperative bank also has an SBI complaint pending against it as well as an FIR lodged by BoI. According to RBI regional director VS Das, allthe banks, except PNB, have delivered gold physically against bankers' cheque or pay-orders issued by Classic Co-operative Bank.

The RBI has started scrutinising the books of accounts of Classic and it hopes to submit its final report to its Mumbai headquarters by Monday. Many Ahmedabad-based banks are understood to have agreed to write off part of the losses that may have arisen out of accepting `hollow' payorders against the sale of gold to the traders under cloud.

Curiously, the two sons of the KLC promoter, Naresh K Chokshi and Jignesh K Chokshi, have resurfaced after going underground immediately after the news of the scandal was out. The Choksi shop at Manek Chowk in Ahmedabad was closed for the past few days, but one of the brothers has been seen sitting there with the shop open, indicating all’s fine.